(PUB) Investing 2015

Morningstar FundInvestor

11

July 2015

Falling Stars? Red Flags | Greg Carlson

Royce remains at the helm of this fund, and it retains its highly disciplined approach, so it still merits a • . Royce Small-Cap Value, another George charge, underwent similar struggles and saw its star rating decline to 2 stars from 4 . (Morningstar doesn’t assign an Analyst Rating to this fund.) Permanent Portfolio PRPFX This fund’s name reflects its unchanging nature: It maintains a 20% allocation to gold, 5% to silver, another 10% to the Swiss franc, 15% to natural- resources and real estate equities, 35% to U.S. bonds, and 15% to aggressive growth stocks. Thus, the fund’s performance depends on how these various sleeves perform. Its precious-metals stake has been a big drag on returns relative to the conserva- tive-allocation category in recent years; the fund lagged more than three fourths of its peers in 2012 , 2013 , and 2014 (as well as in 2015 through June 30 ), and its star rating dropped to 3 from 5 . The fund has consistently earned a Morningstar Analyst Rating of ˇ because of a thin staff and its inflexible process. Calamos Growth & Income CVTRX This fund mixes growth stocks and convertible bonds. While the latter is a specialty of the firm, its recent record of investing in those securities is mixed (as evidenced by the middling performance of ˇ - rated Calamos Convertible CCVIX ). Meanwhile, as the struggles of ˇ -rated large-growth fund Calamos Growth CVGRX indicate, management has chosen poorly among equities as well. Thus, this moderate-allocation fund’s star rating has declined to 2 stars from 4 since 2012 . Meanwhile, a raft of personnel changes since co- CIO Nick Calamos left the firm in 2012 and industry veteran Gary Black joined and took on that role—a total of eight portfolio managers (counting Nick Calamos) have left the fund, though five remain at the firm—contributed to the downgrade of the fund’s Analyst Rating to ˇ in 2013 . K Contact Greg Carlson at greg.carlson@morningstar.com

When a fund’s Morningstar Rating (which reflects its historical risk-adjusted returns) declines significantly, it’s not always cause for concern. True, sometimes this signals weak execution by management, but it can also simply reflect that a fund’s strategy isn’t in sync with the current market environment. Let’s take a closer look at several funds whose star ratings have dropped by 2 stars during the past three years. Columbia Acorn ACRNX This fund’s rating dropped from 4 stars in 2012 to a recent 2 . The normally risk-averse fund lost nearly as much as its typical mid-growth peer in 2008 and 2011 and lagged badly in 2014 (a choppy environ- ment in which the fund typically has shone in the past). Key personnel changes have taken place in the wake of weak performance: Longtime skipper Charles McQuaid stepped off the fund (and resigned as CIO ) in early 2014 , and comanager Rob Mohn announced he’ll retire in late 2015 . Meanwhile, the fund’s Morningstar Analyst Rating was downgraded to ˇ from Bronze in 2014 because of the manager departures. Royce Low-Priced Stock RYLPX , Royce Premier RYPRX , Royce Small-Cap Value RYVFX Dreadful performance pulled Royce Low-Priced Stock’s rating down to 1 star from 3 stars; it finished in the worst 6% of its Morningstar Category each calendar year from 2011 – 14 . (The fund moved between the small-blend and small-growth categories during this span.) Meanwhile, Whitney George, the lead manager for nearly 14 years (and co- CIO of Royce), left the firm in November 2014 . The fund’s Analyst Rating was downgraded to ˇ from Silver when he left. Royce Premier, which George had comanaged since 2002 , also suffered through a tough stretch from 2012 – 14 and had its Analyst Rating downgraded from Gold when he left. However, firm founder Chuck

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.