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Kinnel's Hits and Misses

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Starting with the January 2007 issue, Morningstar FundInvestor editor Russ Kinnel has been naming fund picks in each January issue. He is here with me today to recap some of his greatest hits and misses over the years.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: I love that you do this Russ, because, A, you put out investment picks and investment themes for the years ahead. But I love that recently you just did a recap of what has worked out and what has worked out not so well, which is really helpful accounting. You took stock of some of the funds that you have recommended over the years. Let's start on a high note. We'll talk about some of the fund picks that you've made that actually worked out very well. Let's talk about Champlain Small Company.

Kinnel: This was a fund we really liked. We knew the manager from his previous gig at Sentinel.

Benz: And you recommended it back in 2007 when you started doing this?

Kinnel: Right. This was a manager who had a good track record and had vowed to close the fund at an earlier level than he had done at previous fund. Just really in our wheelhouse, a good manager with a good track record, but still room to run because he was relatively new with this new fund. Just everything you want in a small-cap fund really.

Benz: It's one that we still recommend. It's Gold-rated small cap growth.

Kinnel: Yes. We still like it today. It's really satisfying to have a fund that's stayed on our recommended list for a long time. Not all of them do, but this one has really consistently delivered. He continues to invest the way we expect, and the fund has performed well.

Benz: Another fund that you recommended right out of the box in 2007 was Vanguard Tax-Managed Balanced. It's Gold-rated, and it's a fund that is meant to be tax-efficient. Let's talk about why you picked it initially and performance has actually unfolded very nicely as well.

Kinnel: Sometimes, boring can be pretty good. This is a fund that's 50% S&P 500, 50% munis, which is unusual for a balanced fund, but it makes a lot of sense because munies are more tax-efficient than taxable bonds. And when you have it within a fund like this, they can do a better job of managing those shifts, essentially rebalancing, than you could. If you own the funds, you might have to pay some capital gains along the way, rebalancing in a taxable account. It's much more efficient done in this format. Really boring, but really good even before tax returns, and then on an after-tax basis, particularly good. I think, again, what could be more boring than indexing in munis, but Vanguard has just done a really nice job here.

Benz: It's a great one-stop fund. If you have some taxable investments that you don't need imminently, it seems like a good pick to just kind of set and forget it?

Kinnel: Yeah, I love the conservative approach of these balanced funds, because it does take away some of the downside of a pure equity fund. For some people, that's really important.

Benz: Right. Let's talk about another one of the picks that you made that went on to perform quite well. This is the one that I own, Vanguard Primecap Core. It's run by the Primecap team. So, in a way, picking this fund was a little bit of a gimme, right, because we liked Primecap going into this fund's launch?

Kinnel: For sure. Primecap started off running Vanguard Primecap. Then they later added a couple of more funds at Vanguard as well as three of their own proprietary funds that were not from Vanguard. They are all great. We knew they were great. In the case of these funds, it takes a little more effort in that you have to buy them more or less from Vanguard. Even the Primecap-labeled funds or go straight to Primecap. Just really great growth managers, more experienced. They just go a little deeper. They are a little more valuation-sensitive. It's been a really rewarding fund, as have the rest of their funds. It's just another one that it's nice when it works out this way. Low cost, good management, stable management, and here we are 11 years later, and it still looks really good.

Benz: Right. You recommended that one back in 2008. Let's move to the other side of the ledger and talk about some picks that you made that subsequently did not perform as well as you had expected. Let's start with what was then called Artio International; it's now called Aberdeen Select International. Let's talk about why you picked it initially and what has sort of unfolded in the ensuing years?

Kinnel: This is a fund that had a really good track record and a couple of good managers. It did kind of a nice blend apparently of macro and micro. But unfortunately, from the '08 crisis on, the kind of macro they did stopped really working--the kind of macro that's more like valuation-driven as opposed to central bank driven. It really stopped working very well. They later sold to Aberdeen and Aberdeen took it over, but after a number of years of disappointing performance. Really this was close to the end of its very nice long run. It seemed to have good ingredients, but it didn't work out.

Benz: Another fund that you recommended that has not had such great performance, you recommended it in 2008, over the next decade it did not perform particularly well, Longleaf Partners. This was a real favorite. I know when I was on board as an analyst, we really liked the team here and the strategy. Why do you think the fund underdelivered?

Kinnel: As you say, it had a lot of things we look for--really good stewardship, managers who really looked at the long haul and were very cautious with their investments, but it didn't work. I think part of it is that they ran a concentrated portfolio and some of their names just didn't work. They really stuck with them, and in the ensuing 10 years growth has been a better place than value and they have really avoided a lot of the growth names that have done well. Avoiding the winners and unfortunately, really got locked into some stocks that haven't done well. It's evidence sometimes even good ingredients don't work so well. You had a lot to like. Looking back, it's hard to see what should have spotted, but now we look and see it just hasn't executed that well and they have just held some names too long really.

Benz: When you survey this group of winners and losers, are there any big takeaways that jump out at you, things that you've learned, things that other investors could potentially take away from some of these picks and misses?

Kinnel: It's great to celebrate the wins, but it's also really sobering to see that I've missed on a number. And I think on the plus side, stable management, good strategy, low costs tend to work really well. But as the Longleaf case illustrates, it doesn't always work so well. I think one of the errors I made in a number of these annual issues was, because investors tend to do better conservative funds, I leaned probably little too heavily to conservative funds with the idea of keeping people invested. As it turned out, some of the conservative funds just were disappointing and obviously, a long-running bull market didn't work for them. I would say, that's maybe my biggest takeaway, maybe I was a little too conservative. I don't think you are going to hit all of your picks, but for sure, that was maybe my greatest takeaway.

Benz: Overall, we should say that your hits did outnumber your misses.

Kinnel: There were more hits than misses, thank goodness.

Benz: Russ, thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for