(PUB) Investing 2015

August 2015

Morningstar FundInvestor

9

The study offers a bit more evidence that extreme inflows or outflows can affect your fund’s future. Big outflows jeopardize the viability of funds; impatient fund families may pull the plug on lagging strategies that are suffering heavy redemptions rather than wait for rebounds. Large inflows, while not hurting funds’ odds of survival, can presage more-mediocre future performance. While heavy inflows and outflows are not definitive sell signals, they should be a sign to pay closer attention. Here are Morningstar 500 funds whose top- or bottom-decile one- and three-year outflows or inflows raise questions. Worry Warts Outflow is just one of Columbia Acorn ’s ACRNX worries. The fund has experienced significant management and analyst staff changes in the past year or so in addition to experiencing heavier out- flows than 99% of its mid-growth peers over the trailing one- and three-year periods. With $11 . 5 billion in assets and a still-decent 15 -year track record, the fund, which has a Morningstar Analyst Rating of Neutral, probably isn’t in jeopardy of merger or liquidation, but the changes and persistent outflows don’t make its job any easier. Huge outflows of $3 . 5 billion over the past three years also have complicated matters at the sprawling Royce Pennsylvania Mutual PENNX . This fund, too, has been in an extended slump, with returns in the bottom decile of the category over all trailing periods up to 10 years. It still has $4 . 5 billion in assets and veteran management, but sustained outflows don’t improve the picture here. Eventide Gilead ETILX has posted stellar perform- ance since its inception, but it, too, has accumulated red flags. Performance has been hot and driven by biotech and technology shares, expenses are very high, and the fund hasn’t really seen a market that has turned against its aggressive approach. On top of that, it has gathered assets faster than about 95% of other mid-growth funds over the trailing one- and three-year periods. K Contact Daniel Culloton at daniel.culloton@morningstar.com

Foreign Large-Cap Funds

p Decile 1

p Decile 5

p Decile 10

Extreme Flows Can Be Unhealthy

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The charts show that heavy outflows hurt certain funds’ odds of surviving and outperforming, and big inflows can impede future performance. Decile 1 includes funds with the lowest organic growth rates, or biggest outflows or smallest inflows; decile 10 includes those with the highest organic growth rate, or most inflows. The start of each line in the first column marks the begin- ning of the rolling three-year periods between 2006 and 2014 when all funds examined still existed. The lines then track the percentage of those funds that survived the subsequent three- year periods (the second column) and (in the third column) outper- formed their average peers. The domestic mid- and small-cap categories and foreign large-cap group showed the most dramatic drop-offs in both decile 1 and decile 10.

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Survive (3- Y r Returns)

Outperform (Success Ratio)

Mid-Cap Funds

p Decile 1

p Decile 5

p Decile 10

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80%

60%

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20%

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Survive (3- Y r Returns)

Outperform (Success Ratio)

Small-Cap Funds

p Decile 1

p Decile 5

p Decile 10

100%

80%

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40%

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Survive (3- Y r Returns)

Outperform (Success Ratio)

Data as of Dec. 31, 2014.

funds and those seeing the most outflows. Interest- ingly, in most groups the subsequent three-year performance of funds that survived heavy outflows was not that bad. This may indicate that heavy outflows are a better predictor of which funds are going to get merged away or liquidated than of subsequent underperformance. Thus, the deaths of scores of poorer-performing funds make the sub- sequent performance of their highly redeemed fund cohorts look better.