(PUB) Investing 2015

June 2015

Morningstar FundInvestor

11

New Managers Who Have Yet to Make Their Mark Red Flags | Katie Reichart

an above-average stake in non-U.S. stocks (particularly emerging markets) relative to its small-growth Morningstar Category, which has caused it to look out of step with its peers. The fund’s significant stake in India actually helped performance during the past three years, though broader stock-picking within the technology sector has taken a toll. During the trailing three years through May, the fund lagged the Russell 2000 Growth Index by more than 3 percentage points annualized and landed in the category’s bottom third. Fidelity Small Cap Stock FSLCX Lionel Harris is going on his fourth year at this Bronze-rated fund, though performance has looked pedestrian thus far. For the trailing three years through May, the fund lands in the small-blend cate- gory’s 58 th percentile and trails the Russell 2000 Index by 1 . 5 percentage points. But part of that is due to the types of high-quality, durable companies Harris prefers, which haven’t been in favor as much as lower-quality fare during his tenure. It’s encouraging that the fund has done a better job than peers during down markets, as would be expected given his more cautious approach. That came in handy during 2014 ’s rocky environment for small caps, when the fund outperformed 85% of its peers. Fidelity Equity-Income FEQIX James Morrow took over in late 2011 as part of Fidelity’s efforts to improve its value fund lineup. The fund has changed for the better, mostly because it now lives up to its name and focuses on income, which it garners through dividend-paying stocks, convertible bonds, and preferred stocks. But while it has done a better job of meeting investors’ expectations as Morrow has boosted the fund’s yield, it’s not yet evident that it’s a preferred option. It has lagged its Russell 3000 Value Index by more than 200 basis points annualized during the past three years through May and lands in the large-value category’s 64 th percentile. K Contact Katie Reichart at katie.reichart@morningstar.com

When a new manager takes over a fund, it always takes a little time to assess how he’ll implement his process and whether he’ll be successful. While there’s no magic time frame for when a new manager can be deemed a success or failure, three years is a reasonable amount of time to look back and see how the fund has fared after the manager has had a chance to settle in. Of course, three years is hardly a full market cycle. Depending on a fund’s approach and portfolio bets, there could be good reason for it to be lagging in the short term, so three-year performance alone shouldn’t be used to judge a fund. Below are a few funds that are off to shaky starts during the manager’s first three years on the job. Third Avenue International Value TAVIX This fund has been in rebuilding mode for the past few years. Several analysts left the firm in 2013 , and former lead manager Amit Wadhwaney departed in June 2014 after more than 12 years at the fund. Current lead manager Matthew Fine joined the management team in 2012 and had served as an analyst on the fund since 2003 , so he is well versed in the firm’s philosophy of buying cheap, financially sturdy companies. However, performance hasn’t shone during his tenure, with weakness in industrials and materials names dragging on results, and the turnover in investment personnel at the firm is troubling. During the trailing three years through May 2015 , the fund’s 9 . 1% annualized gain lagged the MSCI ACWI ex USA Index and nearly all of its foreign small/mid-value peers. Wasatch Ultra Growth WAMCX John Malooly joined longtime manager Ajay Krishnan at this fund in January 2012 , working with him for a year before Krishnan left to focus on Wasatch Emerging Markets Select WAESX , Wasatch Global Opportunities WAGOX , and Wasatch Emerging India WAINX . The fund has always had

What is Red Flags? Red Flags is designed to alert you to funds’ hidden risks. Such risks can take many forms, including asset bloat, the departure of a solid manager, or a focus on an overhyped asset class. Not every fund featured in Red Flags is a sell, and in fact, some are good long-term holdings. But investors should be prepared for a potentially bumpier ride in the near future.