Swimming With the Tide Won't Always Benefit Investors

Karen Wallace: I'm Karen Wallace for Morningstar. Investors are increasingly getting it right by buying well-run, low-cost funds and selling high-cost failures. But one area where many investors still struggle is relying too heavily on short-term performance when timing their investment purchases and sales. Here to discuss that topic is Russ Kinnel. He is director of manager research for Morningstar and editor of Morningstar FundInvestor.

Russ, thanks so much for being here.

Russ Kinnel: Good to be here.

Wallace: In a recent FundInvestor cover story, you identified some funds that had had some strong three-year performance and some big inflows. But these are funds in which our analysts don't really have high conviction.

Kinnel: That's right. Not all the funds getting inflows are ones we like. One of them is Calamos Market Neutral, a fund that has had strong performance the last year relative to other market neutral funds, so I understand why it's getting inflows. But it's had some key people turnover in the last three years. In addition, its market beta has gone up, which, in a rising market, like lately is a good thing, but it does mean it's got greater risk than it used to have.

Wallace: And on the flip side, you found some funds that have had sort of middling short- and medium-term performance, and they've had some outflows. But these are funds in which our analysts have higher conviction.

Kinnel: That's right. There are some funds that have kind of mediocre three- to five-year numbers, but good long-term numbers. And in a couple of examples there are funds that have emphasized quality, and quality is kind of lagging lately because everyone is really focused on Facebook, Amazon, the fast-growing names. So, the quality emphasis has lagged. So, there's a good reason to see why this might turn around.

So, Gold-rated FMI Large Cap is one fund we really like, run by Pat English out of Milwaukee. Another one is Silver-rated BBH Core Select, a really good, fairly concentrated quality fund, reopened last year as assets have flipped and gone out. But we still really have faith in the fund.

Wallace: In your study, you also noted that there are times that investors really do get it right. You found some funds with some high organic growth rates that are also medalists that we rate pretty highly. Can we discuss a few of those?

Kinnel: Sure. Fidelity Large Cap Stock is run by Matt Fruhan. It's a Silver-rated fund. It's got about a 60% organic growth rate, but it's not that big a fund. We rate it Silver. He has actually built a really nice record there. So, we like that one.

Another one we like is Champlain Mid Cap, which might close within the next year or so. They say they are about $1 billion away from hitting their capacity at which they would close. But it's a really strong fund. So, it makes sense to us that investors would be piling on on that fund.

Wallace: OK, great. Well, thanks so much for being here to discuss your research.

Kinnel: You're welcome.

Wallace: For Morningstar, I'm Karen Wallace. Thanks for watching.