Investment Strategy
We seek to pick winning funds with superior management and quantitative characteristics linked to strong performance. Our quantitative research uses the most comprehensive mutual fund database in the world to determine the best strategies for long-term investing success. We then supplement those studies with extensive qualitative research of portfolio managers, analysts, and traders through onsite visits and follow-up phone calls.
 
About the Editor
Russel Kinnel is director of mutual fund research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors. He also writes the Fund Spy column for Morningstar.com, the company's investment Web site.

Since joining the company in 1994, Kinnel has covered the Fidelity, Janus, T. Rowe Price, and Vanguard mutual fund families. He helped develop the new Morningstar Rating for funds and the new Morningstar Style Box methodology. He also is co-author of the company's first book, The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, which was published in January 2003.

 
 
Jul 25, 2014
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About Russel Russ' Photo
Russel Kinnel,
Director of Fund Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of mutual fund research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
New Money Market Fund Rules

The SEC has put out new money market fund rules. It appears that not much will change for individual investors, but there are some potential liquidity fees meant to forestall a run on the bank. John Rekenthaler has details here

3 Defensive Fund Picks
Christine Benz and I chatted about defensive funds in this video.

A Downgrade for Calamos Market Neutral Income
A manager change has spurred us to lower our Morningstar Analyst Rating on Calamos Market Neutral Income CVSIX. Here's Josh Charney's take:

The departure of Calamos Market Neutral Income's lead manager has prompted
Morningstar to lower the fund's Morningstar Analyst Rating to Neutral from
Bronze.

This fund's lead manager, Christopher Hartman, departed Calamos at the end of June, citing personal reasons. But even before Hartman's exit, questions were
mounting regarding the fund's capacity and its parent company. Following
Calamos' hiring of former Janus CEO, Gary Black, in August 2012, a number of
key personnel exited, including recent departures of another key portfolio
manager, and the firm's president and chief operating officer. Additionally,
Calamos had historically been keen to limit this fund's assets, as convertible
arbitrage tends to be a capacity constrained strategy. But since the fund's
early 2013 reopening, assets have soared to record levels, from $2.5 to $4
billion. Hartman's departure was also sudden, giving the firm little opportunity to look for an outside replacement. His replacement, Eli Pars, rejoined Calamos last year. Although he boasts more than a decade of experience in convertibles, his tenure at Calamos is short, and his management track record is unknown.

This fund does not consist entirely of convertible arbitrage, employing three
low-beta strategies: convertible arbitrage (48.5%), covered call (45.0%), and
equity market-neutral (6.5%), as of June 30. The growth of the covered-call and
market-neutral strategies reflects management's desire to diversify away from
convertible bonds, which can get squeezed at inopportune times. But it also
indicates that opportunities are becoming scarcer--the fund has ramped up its
exposure to synthetic convertibles as well. If inflows continue, the fund may
be forced to rely more heavily on synthetics, its covered-call sleeve, or its
newer market-neutral strategy. Historically, it appears the convertible-arbitrage
sleeve has exhibited a superior track record compared with the covered-call
sleeve.

Although this fund is one of the cheaper options in the Morningstar Category and has a strong track record, investors should consider waiting on the sidelines until
the dust settles.

Vanguard Large Cap Index
Finally, we issued a Gold rating on Vanguard Large Cap Index VLCAX. The fund follows a different index than Vanguard 500 VFINX, though it's really a pretty similar portfolio. Here's Michael Rawson's take:

Vanguard Large Cap, with its low cost and broad coverage of large-cap U.S. stocks, is a fine choice for the domestic-equity sleeve of a portfolio.

This fund is an ideal core portfolio building block because of its broad
diversification across industries and individual large-cap U.S. stocks. Its low
costs give it a perennial advantage over higher-cost actively managed
alternatives. As an index fund, it should provide the full risk and returns of
its asset class. Unlike some of its peers, the fund does not attempt to limit
downside during market downturns. The fund includes all large- and mid-cap
stocks in both Vanguard Mega Cap and Vanguard Mid Cap. However, it excludes
small-cap stocks so it could be paired with Vanguard Small Cap.

This fund follows an index by CRSP that includes roughly 660 stocks, but it has a
high degree of overlap with the S&P 500. Consequently, investors do not need to own funds that track both of these indexes. Likewise, the fund overlaps with Vanguard Total Stock Market, which differs only in that it includes small-
and micro-cap stocks whereas this fund does not. Holding a total stock market
index fund has the potential to be slightly more tax-efficient because it requires
less turnover. This fund is better suited to those investors who want to avoid
the fractionally higher risk that results from including small caps.

Investors in this fund should expect similar performance to the S&P 500 in the
future. Over the past decade through June 2014, the fund was nearly perfectly
correlated with the S&P 500. In addition, volatility of return was 14.8%, about the same as the S&P 500. The return in that time period was 8.2% compared with 7.8% for the S&P 500. Over this time period, the fund placed ahead of 80% of large-blend funds that survived the period.

With its rock-bottom fees and tight tracking of the asset class, this fund has a
reasonable chance of outperforming its peer group over a full market cycle,
hence the Morningstar Analyst Rating of Gold.

 

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