(PUB) Investing 2015

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Who Fell Out of the Fantastic 50? Morningstar Research | Laura Pavlenko Lutton

been strong, thanks in part to a higher equity stake relative to peers.

Fidelity Capital Appreciation FDCAX This fund also missed the Fantastic list because of a higher expense ratio, but the change in cost is related to the fund’s strong past performance. Fidelity is one of a few large asset managers that has performance fees on many of its funds, where the expense ratio ticks up after a period of outperfomance or goes down if the fund has trailed its benchmark. Morningstar supports such fulcrum fees, so long as the fee swings are modest. In the case of this large-growth fund, the expense ratio goes up 2 basis points for every percentage point the fund’s annual return exceeds its benchmark, the Russell 1000 Growth Index. In 2013 , the fund outpaced that index by 2 . 47 percentage points, upping the expense ratio by 4 basis points to 0 . 81% . This increase moved the fund’s expenses beyond the category’s cheapest quintile, but the fund still earns a Positive Price Pillar rating and the offering overall is rated Bronze. Expect expenses to continue to bounce around: Manager Fergus Shiel’s bold bets are off at times, but long-term performance is impressive. Manager Changes Put Funds in Flux Fund manager departures can be unsettling, especially if the new manager on the fund is untested. Two funds previously on the Fantastic list passed the baton in 2014 to a manager with less than five years of experience on the fund. T. Rowe Price Equity Income PRFDX Brian Rogers, skipper of this large-value fund for 30 years, is retiring in October, a move well-forecast in typical T. Rowe fashion. John Linehan, the firm’s former head of U.S. equities, will take over the low-turnover portfolio. Linehan is an experienced manager, having comanaged T. Rowe Price Institutional Large-Cap Value TILCX with Rogers since 2004 .

Fewer than a dozen funds deemed Fantastic in 2014 were not included in the 2015 list. Two were dinged for their expense ratios, two missed the mark following manager changes, and four funds were cut after long-term performance fell off. Are these deteriorations significant enough to warrant replacing the fund in one’s portfolio? In all but one case, the funds still earn Morningstar Analyst Ratings of Gold, Silver, or Bronze, signaling our conviction that they will outperform going forward. One fund was downgraded to Bronze from Silver, and another fell one notch to Neutral, suggesting the funds have significantly steeper climbs. Less-Competitive on Price Two funds previously deemed Fantastic were dropped because their expense ratios went up. While a basis point or two may disqualify a fund from the Fantastic list, the fees on these funds are by no means alarming. American Funds Capital Income Builder CAIBX This world-allocation fund’s expense ratio has moved around slightly in recent years, from as low as 0 . 55% heading into the financial crisis to a high of 0 . 66% in 2009 . The fund had been treading in the middle of that range in recent years, and in 2014 , the fund’s levy ticked up 1 basis point to 0 . 62% . Even with that 1 -basis-point move, the fund is still a relatively good deal. It retains its Analyst Rating of Silver—including a Positive Price Pillar rating. It is the largest offering in the world- allocation Morningstar Category by a long shot, and its experienced management team recently split the fund’s assets between two internal, yet independent, investment teams to better steer the fund’s equity stake. The fund’s performance has

Linehan’s newcomer status to this particular strategy, however, eliminates the fund from the Fantastic