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 manager 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.

 
 
May 01, 2016
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About Russel Russ' Photo
Russel Kinnel,
Director of Manager Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
Some of Our Best Investing Ideas

In case you missed the Individual Investor Conference, we’ve posted videos of each session. This one covers some top ideas from Ben Johnson, Elizabeth Collins, and me.

Second-Quarter Outlook
We’ve posted our second-quarter Morningstar Market Outlook. You can find it on the FundInvestor home page 
under Bonus Reports.

Neuberger Fund Upgraded
We upgraded Neuberger Berman International Equity NIQVX to Silver from Bronze. Here is Gregg Wolper’s take:

Neuberger Berman International Equity's list of solid attributes keeps growing, earning the fund a Morningstar Analyst Rating of Silver, upgraded from Bronze.

This fund added another impressive chapter to its history during the past few years. Both 2014 and 2015 were difficult for funds investing outside of the United States, owing to worries about modest global growth, political instability in Europe and elsewhere, and foreign currency weakness versus the U.S. dollar. Although not set up as a defensive fund--manager Benjamin Segal tilts toward growth, prefers mid-caps, and remains fully invested--this fund has performed admirably during this stretch. In both years, the fund handily outperformed its benchmark, the MSCI EAFE Index, as well as the MSCI ACWI ex USA Index (which includes emerging markets), and both the foreign large-blend and foreign large-growth Morningstar Category averages. (The fund's portfolio typically lies near the border between the two groups.)

Segal prefers mid-caps when he can find ones that boast sustainable growth rates with strong balance sheets and impressive management. That gives this portfolio an uncommon all-cap flavor. In theory, that could make the fund more volatile than rivals that stick mainly to household names. But over time, the fund's standard deviation and Morningstar Risk scores are around the foreign large-blend average, and in some periods are significantly milder. The stability of the team is another plus: Segal has been running this fund since the early 2000s (this fund launched in 2005 but a clone--now merged away--existed long before), and his six-person analyst group hasn't had a departure since early 2011.

There are two other attractive attributes here. In order to continue investing meaningfully in mid-caps and even some small stocks, Segal has closed the fund to new investors in the past and says it will close again if assets reach about $5 billion in all vehicles (the figure is around $3 billion now). Meanwhile, the expense ratio is reasonable. All told, this fund deserves attention.

Fidelity Capital Appreciation Lowered to Neutral
Meantime, Fidelity Capital Appreciation FDCAX has been cut to Neutral from Bronze. Here is Katie Reichart’s take:

During his decade-long tenure at Fidelity Capital Appreciation, manager Fergus Shiel has unabashedly pursued returns in an unconventional way. Unlike many managers, he's not worried about building a well-diversified portfolio by traditional standards. Instead, the fast-trading fund has featured big bets on particular industries and companies, with a vague process that makes it hard to know what to expect. The fund also has an undesirable risk profile. For those reasons, we have downgraded its Morningstar Analyst Rating to Neutral from Bronze.

Shiel quips that his process is not to have a process. While it can be beneficial for managers to avoid being too tethered to a benchmark, Shiel's bold approach has invited much risk. For instance, the fund's biotech stake was recently 24% of assets, which has weighed on results during the trailing year through March. Shiel argues that the biotech firms he owns generate a lot of cash and can sustain growth even if the economy tumbles.

However, there's not much emphasis on portfolio construction or risk management at the fund. Individual position sizes can be quite large (top holding Gilead GILD was recently 8% of assets), and the portfolio can change on a dime; turnover has averaged 166% during the past decade versus the large-growth Morningstar Category average of 86%. Not only does that boost trading costs and lessen tax efficiency, but it's hard to predict what form the fund will take next.

The fund beat 64% of its large-growth peers from Shiel's 2005 start through March 2016 and slightly edged the S&P 500 benchmark. However, the fund hasn't posted the outsized returns you might expect from such a bold strategy, and it loses its advantage on a risk-adjusted basis. It has performed particularly poorly in pullbacks, losing 110% as much as the benchmark on his watch while gaining less on the upside. Investors haven't reaped the benefits of the fund, either: Its dollar-weighted returns for the past 10 years through March lagged total returns by nearly 3 percentage points annualized. The fund is simply too unpredictable to warrant a recommendation, so its rating is Neutral.

 

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