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3 Great Funds Taking a Beating This Year

Katie Rushkewicz Reichart, CFA
Maciej Kowara

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. Highly rated funds aren't always chart-toppers. They can slump if their styles fall out of favor relative to their peers. Today, we are taking a look at three funds that earn Morningstar Analyst Ratings of Gold whose year-to-date returns land near the bottom of their respective categories.

Katie Reichart: Gold-rated Oakmark Fund is in a slump this year, but investors shouldn't count it out. The fund is down 2.5% for the year to date through November, while the S&P 500 is up 5%. There are a few reasons for its underperformance. GE is undergoing a restructuring under a new management team, and it's lost over half its value for the year. Some detractors are names the managers have bought in the past year, so they might have been a bit early on them, including Flex and DXC Technology. Other holdings are financials names that fund has owned for a long time that have done well at other points but are doing poorly this year, such as AIG and State Street. The fund has typically underperformed for stretches but it's always rebounded strongly, including after rough patches in 2008 and 2015. Manager Bill Nygren is experienced and is sticking with his long-term mindset, and so are we.

Maciej Kowara: Western Asset Core Plus Bond Fund is a Gold-rated fund that has had a fantastic run after the financial crisis, but 2018 has proven difficult for it. The fund is underperforming its benchmark and the majority of its peers this year. There are two reasons for this underperformance. One is long duration; two is emerging markets. The fund has long been using long duration partially as a hedge against problems developing in risk assets of which emerging markets are one. Emerging markets, on the other hand, looked attractive from the valuation standpoint and from the reading of the global economy, at least at the beginning of the year. Now, what happened this year is that that hedge failed to work. Treasuries are down, and emerging markets are down even more. Nonetheless, we still have full confidence in the fund and believe that investors who stick with the fund for the long haul will be amply rewarded.

Alec Lucas: Gold-rated American Funds New Economy's year-to-date 2018 performance is a reminder of the fund's risk profile. The fund is nearly global in its pursuit of innovative companies and it invests broadly across the market cap spectrum. It's not uncommon for the fund to invest 60% of its assets in U.S. stocks and most of the remainder overseas in Asia. That kind of profile was a big help to the fund in 2017 relative to the Morningstar large-growth category. But it has hurt the fund thus far in 2018. Top 10 holdings Samsung, Galaxy Entertainment Group, and Tencent have all hurt the fund in 2018. But relative to the MSCI All Country World Index, the fund's results remain competitive and even superior. It remains a very good fund long term for investors who understand its risk profile.