Screening for Problem Funds
Our Premium Fund Screener uncovers some possible sell candidates.
Regular readers of Five Star Investor columns know that we frequently use Morningstar’s Premium Fund Screenerto devise filters that help investors uncover best-of-breed funds. In the past, for instance, we’ve whittled down the vast universe of mutual funds to just those cream-of-the-crop core offerings that let you sleep at night, high-yield bond funds for the long haul, and even the best and brightest of the subgroup of funds that invest according to socially responsible criteria.
If you haven’t yet read those articles, now would be a good time to catch up. The Premium Fund Screener is a powerful tool that really can help you home in on funds that are right for your portfolio. Even better, you can save your screens and watch as results change over time, or tweak them as your goals and risk tolerance change.
That said, investors aren’t always looking for funds to buy. Sometimes shareholders want to know if a fund they own is a sell candidate--particularly, of course, after a period of protracted underperformance or when expenses start to tick up. Morningstar’s Analyst Reports remain your best bet when it comes to making that decision, of course, but the Premium Fund Screener can be a useful resource, too.
This week, we'll show you two screens that will help you spot potential sell candidates. First, we'll zero in on growth funds whose fees may have ticked up lately. Expense ratios sometimes rise as assets under management shrink, and given the shellacking growth funds took during the bear market, some investors may now be holding relatively pricey picks. That doesn't make them automatic sell candidates, of course, but a high price tag always warrants investigation.
To run our expenses screen, click here.
For this screen, we simply filtered for diversified domestic-equity growth funds whose expense ratios are above average. Consequently, the tool returned plenty of results. Fine-tuning the filter for more narrowly focused results is simple stuff, however. Click the back button at the bottom of the results page, and you can tweak the screen to scan for, say, just pricey large-growth funds.
For our second screen, we'll filter for funds that have fallen on hard times. More specifically, we'll look for those offerings whose 10-year track records still rank among their peer groups’ best but whose five-year trailing returns look anemic. We’ll test for possible management shakeups by screening for offerings whose teams have been on the case for relatively short periods of time. And as always, we’ll filter for distinct portfolios only, since that will eliminate multiple share classes of the same fund.
Click hereto run this screen yourself.
Fortunately, the number of funds that meet the criteria for this screen is quite small. Indeed, only two core holdings make the failing grade. But, to ask the burning question, if any of these struggling picks reside in your portfolio, should you immediately kick them out?
Absolutely not. Before coming to a conclusion about that, you’ll need to research the reasons for the fund’s poor performance. Has there been a management downgrade? A significant strategy change? Those may be compelling reasons to sell. If, however, all the reasons you bought the fund to begin with remain intact, you’ll likely want to stay the course.
Morningstar analysts have weighed in on all but one of the funds that turned up in this screen's results, and so their reports should be your first stop. In the meantime, we highlight (or lowlight, as the case may be) three of the laggards below.
Fidelity Select Health Care (FSPHX)
This fund offers broad health-care exposure, but drug firms are consistently the biggest drivers of its performance. Pharmaceutical stocks have been a drag in recent years, but the fund has delivered competitive long-term returns with relatively modest volatility. We like this fund a lot--it's a Fund Analyst Pick in the specialty-health category--but it does have a history of frequent manager turnover.
Weitz Hickory (WEHIX)
This value fund buys only about 30 stocks and concentrates its holdings in a few sectors. Although it has hurt the fund in recent years, the strategy has worked well in the past. The fund closed its doors to new investors in 1998. It changed managers at the end of 2002.
Strong Corporate Bond Inv
Manager Janet Rilling concentrates on BBB rated issues and holds a bit less than 10% of the fund's assets in junk bonds (down from 20% in years past). Since becoming lead manager in July 2002, she has worked to reduce the fund's individual position sizes in an effort to limit the fund's volatility. She keeps duration (a measure of interest-rate risk) within a year of the Lehman Brothers BBB Corporate Index's.
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.