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.

 
 
Feb 13, 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
Financials Take a Hit

We finished January with a nice little bounce to recoup some losses in equities, but the sellers returned in force on Monday. This time, bank stocks were the particular focus, though tech and biotech felt pain, too.

In Europe, concerns were focused on whether some big banks would be able to make the payments on contingent convertible bonds. The structure is kind of complicated, but they are near the bottom of the bond pecking order and therefore might be the first to feel pain. (The Financial Times has a nice explainer here.)

The selling continued in the United States, where Bank of America and Goldman Sachs are down about 5% from their close on Sunday through 10 a.m. Central on Tuesday. In the U.S., the focus was on bad loans to energy companies. Last week, senior analyst Jim Senegal of Morningstar posted this note:

“We've taken a close look at banks' energy exposures and potential losses, and see both good news and bad news for investors. First, the good news--for most banks, we think the losses will be manageable. And now the bad news--nearly all banks are under-reserved and several could be facing capital shortfalls in a worst-case scenario.”

I should note that it is always a little tricky to ascribe reasons for a one- or two-day move without an obvious news event, so the above explanation is only a best guess of those following the markets.

A few equity funds in the Morningstar 500 fell more than 4% on Monday, and about 15 fell between 3% and 4%. Scotia Dynamic U.S. Growth DWUGX and CGM Focus CGMFX lost 4.9%. Longleaf Partners LLPFX lost nearly 4% as longtime holding Chesapeake Energy CHK had more bad news for Wall Street.

Signs of Strength in Jobs Report
Last Friday’s unemployment report had some good news in the details according to our Bob Johnson.

Vanguard Capital Value Downgraded
We lowered our Morningstar Analyst Rating on Vanguard Capital Value VCVLX to Neutral. Here’s Kevin McDevitt’s take:

Vanguard Capital Value is being downgraded to a Morningstar Analyst Rating of Neutral because of its imbalance between risk and reward.

The latest sell-off confirms how ill-suited this fund is to bear markets. This is the second significant correction since managers Peter Higgins and David Palmer's joint tenure began in December 2009. The fund's results were brutal in both cases. In mid-2011, the fund fell nearly 30% peak-to-trough versus a milder 19.3% drop for the Russell 3000 Index. This time around, the fund has plummeted 26% from late May 2015 through January 2016, while the Russell 3000 Index has lost just 11.3%.

The main culprit continues to be the fund's overweighting in energy, which both managers have contributed to. The portfolio held 13.9% of its assets in energy stocks at the end of September 2015 versus 5.9% for the Russell 3000 Index and 11.6% for the Russell 3000 Value Index. That stake was composed mainly of exploration and production companies, which have cratered along with the price of oil. But energy hasn't been the only cause of the fund's pain, as a lighter stake in more-stable consumer stocks has also hurt.

The fund's results during down markets sharply contrast with its returns during rallies. The fund turned in top-decile relative returns during calendar 2009, 2012, and 2013. These wide swings in performance make this fund the epitome of a highly volatile, high-beta investment. The problem is that this latest washout tilts the risk/reward balance clearly out of the fund's favor. It now trails the Russell 3000 Index by 4 percentage points annualized since the current duo's tenure began and looks even worse on a risk-adjusted basis. Over the past five years, the fund's standard deviation--a measure of volatility--is 18.1% versus 12.1% for the Russell 3000 Index.

The fund could make up the lost ground in its trailing results during an extended rally. But barring a change in its two managers' approach to risk management, it's hard to see how the fund will outshine its benchmark over the long term on a risk-adjusted basis.


 


 


 

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