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Kinnel: 3 Great Funds Hiding in Plain Sight

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz from Morningstar.com. Many mutual funds from the big shops are very large, but a handful of them are quite small and undiscovered. Joining me to discuss some noteworthy ones among them is Russ Kinnel, he's director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Happy to be here.

Benz: In your latest issue of Morningstar FundInvestor you wrote about some of the relatively undiscovered funds from the big shops--Fidelity, Vanguard, T. Rowe Price. I wanted to talk about a handful of them today. Let's start with--and we'll go from Bronze to Silver to Gold--let's start with a Bronze-rated fund. This one is from Vanguard it's a pretty new fund this is Vanguard International Dividend Appreciation. Let's talk about that one.

Kinnel: A lot of people are probably familiar with the domestic version of Vanguard Dividend Appreciation, which has been a pretty big hit, because it seeks stocks that are going to grow their dividend. The idea is simply let's apply that outside the U.S. Again of course with low fees and it's a pretty new fund less than three years. I think a lot of the good things that work for the U.S. version ought to work for international, we don’t know yet for certain. But again, you have low cost and I think a really sound approach to international investing, as well as obviously you are going to get some income from it too. I think there is a lot of appeal its fairly new, I definitely think its one to watch and we rate it Bronze.

Benz: This is an index fund, correct?

Kinnel: Yes.

Benz: You mentioned income, and any time someone sees dividend in the name they might think that it would have fairly high income, but here not necessarily the case--you are not going to find a 4% yield or anything like that.

Kinnel: That’s right. Because its going after dividend appreciation, not maximum dividend yield. To find dividend appreciation you have to have companies with good balance sheets and decent growth. If you think about emphasis on high yield, you are going to get lots of utilities and other companies that are really slow growth. This is going to have lower yield, but companies with more growth potential and obviously over time ideally your income will grow, too, because those companies are growing and you'll also get some capital appreciation along the way. Again, early days for the fund, but I think very promising.

Benz: Moving on to a Silver-rated fund that is not yet too huge Fidelity International Growth. Let's talk about that one, it has a long-tenured manager, actually, and still not a lot in assets. Let's talk about it.

Kinnel: That’s right Jed Weiss has been at the fund since it was launched in 2007. Yet it's kind of flown under the radar for people, but he's really produced great results. The fund is about 200 basis points a year ahead of the index which is pretty darn impressive, yet again somehow kind of slipped people's notice. We recently upgraded it to Silver. We like the process, he looks for firms with competitive advantage which tends to be in growth. But he also looks for cyclical names with pricing power. Really it kind of has some blend and growth characteristics.

Benz: In the case of this one it's a large-cap fund, correct? Is the fact that it is still not huge going to confer any particular advantage to it, or do you tend to see that having a small asset base is more advantageous if you got focus on smaller mid cap stocks?

Kinnel: I think its advantages of being smaller are fairly modest as you imply, that it's not buying really small names. Of course, Fidelity has other big international funds which are going to be after some of the some companies I am sure. I think in this case its more about highlighting a company, a fund that might have flown under your radar that's really worth investing in. It's not so much let's get in this small fund and there will be special advantages.

Benz: Finally moving on to a Gold-rated fund that you think is relatively underfollowed, underdiscussed--T. Rowe Price Tax Free Income, that's a Gold-rated fund. It's looked a little sleepy recently in terms of its results. Let's talk about what you and the team like there.

Kinnel: What we like is the fund has a really nice approach to credit. They have 11 analysts who do a good job doing research, and we've seen that the fund consistently holds up better when credit gets hurt--in other words when there is concern about the economy or any particular muni issues, the fund consistently does better than it's peers. Yes overall it hasn't been that impressive and I think partly because we have a strong economy and for the most part taking credit risk in the last 10 years has really been rewarded. This is a fund we feel pretty good about owning whether there is recession in the next five years or not. A nice steady fund--just what you'd expect from T. Rowe really, well diversified, well managed, fairly quiet fund.

Benz: Russ, thank you so much for being here to call attention to these three funds that as you say are hiding in plain sight.

Kinnel: You are welcome.

Benz: Thanks for watching. I'm Christine Benz from Morningstar.com.