Morningstar Medalists at the Top of Their Game

A version of this article appeared in the March 2014 issue of Morningstar FundInvestor.

Morningstar Medalists have earned our analysts' confidence in their long-term prospects, so it's great to see those highly rated funds topping the charts in their respective categories, as each of the funds below did. Still, it's as important to understand where good performance is coming from as it is to evaluate poor results. Even when strong returns can be attributed to savvy investments, there are risks associated with all strategies that can lead them to look weak from time to time. Getting a handle on a fund's behavior can help you set the right expectations and be a better owner of the funds you choose.

 American Funds Global Balanced (GBLAX)
American Funds Global Balanced turned three years old at the beginning of February. It has come out with a bang: Its 8.59% annualized three-year return through April 24, 2014, lands at the world-allocation category's best decile. The funny thing is, its portfolio doesn't look all that different from peers', with roughly 60% in stocks split fairly evenly between U.S. and foreign companies, and the rest in bonds and cash. But the fund's defensive portfolio traits, plus an infusion of cash from investors, helped it early on when markets were rocky. More recently, its aversion to struggling emerging markets has helped. A conservative, blue-chip approach is something investors can likely count on, and the fund will probably build a strong long-term record by participating in up markets enough while keeping its setbacks more limited in downturns, as many of its siblings have done for decades.

 Fairholme Focused Income (FOCIX)
Another new fund at just four years old, Bronze-rated Fairholme Focused Income sits near the top of its high-yield bond category with a 10.42% annualized three-year return. Manager Bruce Berkowitz's aggressive style is paying off. In 2013 a huge stake in MBIA bonds (since sold) buoyed results, and Berkowitz has had similar successes where others have feared to tread. The extreme concentration of Berkowitz's portfolios has tended to produce lots of volatility, despite generally hefty cash stakes. Berkowitz has given investors reason to take a leap of faith here--he can boast plenty of success stories--but a long-term horizon and even temper are musts.

 T. Rowe Price Blue Chip Growth (TRBCX)
In the past five calendar years, this fund has turned in its two best annual returns in its 20-year history (best in 2009 and second-best in 2013). Manager Larry Puglia has tilted the portfolio toward more-aggressive (and more-expensive) growth stocks of late; overall, the portfolio has more of a cyclical skew, and that has fueled the fund during market rallies. Its 16.06% annualized three-year return is better than 96% of its large-growth peers' results. Volatility has been on the rise, and the fund could be vulnerable in a weaker market, but Puglia's long-term record is superb and helps earn the fund a Morningstar Analyst Rating of Silver.

 Akre Focus (AKREX)
Silver-rated Akre Focus is a mid-growth fund. Its 20.14% annualized three-year return tops the mid-growth category. This fund was hurt by its only-slight health-care weighting and instead made its money on stocks in financials, consumer discretionary, and information technology. This fund will turn five in August 2014, but its manager, Chuck Akre, has been at investments for decades and boasts a strong long-term record.

 Bogle Small Cap Growth
Bogle Small Cap Growth has returned an annualized 16.7% over the past three years, putting it well in the small-blend category's best decile. With high turnover (more than 200% annually), it can be tough for investors to gauge what's driving returns, but a greater commitment to micro-cap stocks generally has helped. Further, the inclusion of a valuation model here has helped the fund navigate market inflection points better than some other quantitative funds. To be sure, the fund can look out of step at times, but its long-term results inspire confidence.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.