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Fund Spy: Morningstar Medalist Edition

The Most Unloved Medalists of 2014

Should investors be showing these funds more love?

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The quantitative Morningstar Rating for Funds, or the star rating, often correlates with fund flows. Morningstar's qualitative Analyst Ratings, however, don't always move in the same direction as sales. Frequently, but not always, when investors seem to be selling funds, our analysts will maintain Gold, Silver, or Bronze ratings on them. We try not to be reflexive contrarians and to judge each fund on its own merits, using their people, process, parent, performance, and price as our guides. To help illustrate, here is a look at 2014's 10 most unpopular U.S.-based mutual funds with Morningstar Analyst Ratings, in terms of net outflows and what Morningstar analysts currently think of them.

Gross Changes
Half of the funds on the list are from PIMCO. That's not surprising given that chief investment officer Bill Gross split with the firm he founded in a high-profile snit in September 2014. His  PIMCO Total Return (PTTRX) saw the most outflows of all of our rated funds for the second year in a row as $103 billion left the fund in the 12 months ended in December. Investors had been selling the fund before Gross' soap-operatic departure; the fund saw $42 billion in outflows in 2013, probably because of mediocre recent performance and growing investor appetite for more-adventuresome bond funds.

Despite Gross' departure and increasing outflows, though, Morningstar still recommends the fund, albeit with a lower level of conviction. Its Analyst Rating dropped from Gold because of the upheaval, but still merits a Bronze rating because accomplished managers have stepped in for Gross and the firm still has deep resources. You can say the same for  PIMCO Low Duration (PTLDX), another former Gross-run fund that saw $8.4 billion in outflows in 2014.

Morningstar maintains the same level of conviction in  PIMCO All Asset All Authority (PAUIX) and  PIMCO High Yield (PHIYX), which retained their respective Silver and Bronze ratings despite the turmoil and heavy redemptions. Gross' departure has only an indirect impact on PIMCO All Asset All Authority, a unique strategic asset-allocation fund of funds subadvised by Rob Arnott's Research Affiliates. Gross' funds never amounted to more than 12% of All Asset All Authority, and PIMCO's lineup still gives Arnott plenty with which to work. PIMCO High Yield remains a good conservative option in the high-yield Morningstar Category and is run by seasoned manager Andrew Jessop, who has posted respectable returns there since 2010 and at  Goldman Sachs High Yield (GSHAX) for more than a decade prior.

The future's a bit more uncertain for  PIMCO Unconstrained Bond (PFIUX), whose Morningstar Analyst Rating was still Under Review as of this writing. The fund had seen a number of manager changes even before Gross left, and lead manager Saumil Parikh left the firm on Jan. 16. The fund is supposed to be a vehicle for the best ideas of PIMCO's Investment Committee, which is staffed by some redoubtable talent, including former Morningstar Fixed-Income Manager of the Year winners Mark Kiesel of  PIMCO Investment Grade Corporate Bond (PIGIX) and Dan Ivascyn of  PIMCO Income (PIMIX). That panel has seen a lot of reshuffling in the last few months, though, and it will take some time for the fund's new lead manager Marc Seidner to put his mark on the portfolio.

Transfer Stations
Fidelity Investments had two funds on the unpopular list-- Fidelity Contrafund (FCNTX) and  Fidelity Growth Company (FDGRX)--though it's hard to tell if they both really belong. Many of Fidelity's big retirement-plan clients have been shifting assets to collective investment trust versions of the same strategies because they can negotiate better fees for their participants in those vehicles. So, what looks like redemptions may really be transfers; but it's hard to know for sure because Fidelity does not report fund flows in that kind of detail.

It would not be surprising if both funds had been seeing at least some real outflows, though. Fidelity Contrafund has been in a slump in recent years, and Fidelity Growth Company is closed to new investors. Both funds, however, retain their Silver Analyst Ratings because they have very experienced managers with time-tested stock-picking approaches that have produced very strong results over the long term. Will Danoff's more-than 13% annualized gain at Fidelity Contrafund from his September 1990 start through Jan. 21, 2015, trounces the nearly 9.0% gain of the average large-growth fund, the 9.6% gain of the Russell 1000 Growth Index, and the 10.2% gain of the S&P 500 Index. Similarly, Steve Wymer's 10% annualized gain from his January 1997 start at Fidelity Growth Company through the same date beats the Russell 1000 Growth and typical large-growth fund by more than 3 percentage points and the S&P 500 by more than 2.

Turning Tables
Each of the last three funds on the list had been big sellers earlier in the 2000s, only to see their fortunes reverse in more recent years.

Slumping performance and some management changes probably are behind  Thornburg International Value's (TGVAX) $14 billion in 2014 outflows. The fund has finished the past four calendar years in the bottom half of the foreign large-growth category and modified its management team last year. Morningstar downgraded its Analyst Rating to Bronze from Silver in June 2014 because of its lumpy performance, but still thinks that its seasoned managers Bill Fries and Lei Wang can turn things around with their long-adhered-to process that mixes value, consistent growth, and emerging franchise stocks in one portfolio.

 American Funds Growth Fund of America (AGTHX) is another repeat on this list. The fund has recorded six-straight calendar years of outflows, including $8 billion in net redemptions in 2014, largely because of mediocre performance and a growing sense that the fund's still-immense size will keep it from achieving anything more than that. Morningstar has maintained a Bronze rating on the fund, however. Though far from agile, the fund still boasts attributes that can help it compete--namely low costs, a consistent approach, and experienced managers who invest a lot in the fund.

It's been quite a turn of events for  MainStay Marketfield (MFLDX). The alternative strategies fund gathered $13 billion assets in 2013 after putting up decent returns relative to the long-short category during and in the wake of the financial crisis. But an ill-timed bet on rising inflation that has yet to materialize contributed to a 12% loss for the fund last year and revealed the risks of its macro-driven, concentrated portfolio positions. Investors withdrew a net $7.8 billion from the fund in 2014, and Morningstar reduced its Analyst Rating to Neutral from Bronze because of questions about manager Michael Aronstein's risk management.  

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.

Dan Culloton has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.