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4 Funds Investors Are Dumping

4 Funds Investors Are Dumping
Securities In This Article
Principal Small-MidCap Dividend Inc A
Longleaf Partners Small-Cap
Boston Partners Long/Short Rsrch Inv
Lazard Emerging Markets Equity Open

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Which funds are investors selling in 2021? Joining me today to discuss fund flows so far this year is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thanks for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: Let's talk a little bit about fund flows in general in 2021. What have the trends been?

Kinnel: You know, they really have continued a lot of the longer-term trends, moving from active to passive, also open-end to ETF, which is more or less the same thing. ESG funds continue to draw money. Low-cost funds, Vanguard leading the way, also have drawn a lot of money. So, a lot of the broad trends have continued.

Dziubinski: Let's talk a little bit about a few funds that have experienced significant outflows this year, the first being Principal Small-MidCap Dividend Income PMDAX. The fund had a relatively difficult or challenging 2020. It lost a veteran comanager earlier this year, and a significant client pulled out of the fund. What should investors be expecting here?

Kinnel: Yeah. The fund is definitely a challenge. Whenever you have a small- or a mid-cap fund with big outflows, that can be a much bigger problem than, say, at a large-cap fund or a high-quality bond fund. It's definitely worth watching to see if there's an impact. You mentioned Dave Simpson, one of the managers left, but we still like the team. We still rate it Bronze, but the fund had a 73% outflow over the trailing 12 months, which is huge. And so, we'll have to see how that goes. In 2020, their emphasis on dividends led them into energy and financials, which was a really bad place to be. And so far this 2021, that's been a pretty good place to be. So, they've rebounded. That may stem the tide, but it hasn't yet. I definitely think it's worth watching whenever you have outflows in a small/mid fund like this.

Dziubinski: Another fund that's seen pretty sizable outflows is Boston Partners Long/Short Research BPRRX. And we downgraded that fund to Neutral last year. What's going on there?

Kinnel: Yeah. Our reason for downgrading it was when we looked at the process from another angle, we thought, "Well, divvying up the assets among these sector specialists who then decide what they want to go long and short in leads to these sort of unintended macro bets on a sector or a regional level that maybe they wouldn't necessarily want to make." Last year, the fund was very long value and short growth and, as a result, trailed the average peer by about 16 percentage points. As a result, their outflows were about 67%. Now, we don't have a lot of long/short funds with big outflows to compare it to. I'm not really certain exactly what the impact will be. Obviously, they will need to manage both the short and the long end as they handle those flows. But I do think it's definitely a challenge for them as they have to keep that long/short balance and meet a lot of redemptions.

Dziubinski: Now, given that many value strategies have staged a comeback during the past several months, what do you make of the outflows at Longleaf Partners Small-Cap LLSCX, which tends to be a little bit more value-oriented?

Kinnel: Yeah. It's had about 52% outflow. And unfortunately, unlike the first two funds we mentioned, this one just continued to perform poorly. So, it had a bad 2020 and it's having a bad 2021. I definitely expect that those outflows will very likely continue, unfortunately. We used to like this fund. We think it had some good fundamental characteristics, but it's really suffered a long streak of underperformance. And so, it's really been disappointing, and I think those outflows, based on performance, I would imagine, will continue for at least a little while.

Dziubinski: And then, lastly, emerging-markets stock funds have seen some decent inflows lately, but Lazard Emerging Markets Equity LZOEX has been in outflows, and that's on the heels of a few years, again, of relative underperformance. What do we think of that fund today?

Kinnel: Again, emerging markets are another area where you have less liquidity than, say, a U.S. large cap or even European large cap. So, it's something worth keeping an eye on. Once again, the story is about value. They have a value tilt, and so they really underperformed in 2020, though they've come back a little bit in 2021, but a 49% outflow is a pretty significant hit. And so, again, when you get into these levels, you can have a bit of a self-fulfilling action--where outflows cause losses, losses cause outflows. So, again, I think a little caution is warranted. I think it's something we'll want to continue to watch.

Dziubinski: Russ, thank you so much for your perspective today, not only on flows in general, but on these funds specifically. We appreciate it.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.

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About the Authors

Russel Kinnel

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Russel Kinnel is director of ratings, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He heads the North American Medalist Rating Committee, which vets the Morningstar Medalist Rating™ for funds. He is the editor of Morningstar FundInvestor, a monthly newsletter, and has published a number of prominent studies of the fund industry covering subjects such as manager investment, expenses, and investor returns.

Since joining Morningstar in 1994, Kinnel has analyzed virtually every type of fund and has covered the most prominent fund families, including Fidelity, T. Rowe Price, and Vanguard. He has led studies on the predictive power of fund data and helped develop the Morningstar Rating for funds and the Morningstar Style Box methodology. He was co-author of the company's first book, Morningstar Guide to Mutual Funds: 5-Star Strategies for Success (Wiley, 2003), and was author of the book Fund Spy: Morningstar's Inside Secrets to Selecting Mutual Funds That Outperform, published in 2009.

Kinnel holds a bachelor's degree in economics and journalism from the University of Wisconsin.

Susan Dziubinski

Investment Specialist
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Susan Dziubinski is an investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios. She previously managed the company's newsletter and books businesses and led the team that created content for Morningstar's Investing Classroom. She has also edited Morningstar FundInvestor and managed the launch of the Morningstar Rating for stocks. Since 2013, Dziubinski has been delivering Morningstar's long-term perspective and research to investors on

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