(PUB) Investing 2015

22

FMI International Joins M500 Changes to the 500 | Russel Kinnel

This fund has had its share of success since its 1998 inception. It held up very well during the early- 2000 s bear market, when investors dumping pricey tech- nology stocks flocked to the cheap shares in its value- leaning portfolio. It also held its loss below that of peers during the 2007 – 09 crisis and outperformed in some rallies. However, since 2009 , it has per- formed poorly in falling markets, and the depth of the losses is alarming. The fund plunged 20 . 3% in 2011 , more than 6 percentage points worse than the foreign large-blend Morningstar Category average and the MSCI ACWI ex USA Index. It lost 14 . 8% in 2014 and another 0 . 5% in 2015 ’s first quarter, both much worse than the category and index. While the fund’s 15 -year ranking remains high, its five- and 10 -year returns through June 30 , 2015 , lag roughly 90% of its group. If those low rankings resulted merely from the fund lagging during speculative rallies or were attributable to cyclical downturns, they would be more under- standable given the managers’ price-conscious strategy. But these deep losses owed partly to serious stock- picking errors among some large, high-conviction holdings. HRT , a Brazilian energy firm, proved a disas- trous choice because of poor drilling results and what this fund’s managers considered unwise deci- sions. Then Manabi , a private mining-related firm also in Brazil, lost 60% of its value in 2014 and another 46% in 2015 ’s first quarter. Both HRT and Manabi once had been among the highest-weighted stocks in the portfolio. K

We’re adding FMI International FMIJX to the Morningstar 500 . The 5 -star fund was launched at the end of 2010 , and it has already reached $2 . 2 billion in assets. Portfolio manager Pat English and team run FMI International using the same proven process employed at their two domestic-equity funds that have Morningstar Analyst Ratings of Gold. Their low-turnover, highly concentrated approach is indif- ferent to any index’s sector or country weightings. Instead, bottom-up research drives stock picks, and the team prefers durable franchises with proven business models. English emphasizes firms’ enter- prise value and cash flows. That’s apparent in the fund’s lower average debt levels and price/book ratios as well as its higher-than-average returns on invested capital and cash flows. The team hedges most of the fund’s currency expo- sure to the dollar. The fund’s 1 . 00% expense ratio places in the lowest third of funds with similarly distributed share classes. All managers have some level of ownership in the fund, with English investing more than $1 million. Scout International Goes Out To make room, we are dropping Scout International UMBWX , where longtime manager James Moffett retired. We lowered the fund’s rating to Neutral. We don’t have a track record on the new managers, leading us to reset to Neutral. Longleaf Partners International Downgraded Weak performance in 2014 and early 2015 is not the only reason that Longleaf Partners International ’s LLINX Analyst Rating has been reduced to Neutral from Bronze.

What is Morningstar FundInvestor 500 ? The Morningstar FundInvestor 500 features the industry’s best and most notable funds. Use the list to get new in- vestment ideas and track the funds you already own. FundInvestor subscribers have access to one-page monthly reports on all 500 funds on mfi.morningstar.com. Just type in the name or ticker of the fund in the search box.

Summary of Changes Add

Drop

FMI International

Scout International

Rating Change (downgrades)

To

From

‰ ´

Appleseed

‰ ´

Longleaf Partners International

´ •

Matthews China Investor

´ •

Metropolitan West High Yld Bnd

‰ ´

Wasatch Long/Short Investor

New Rating

To

´

Vanguard Global Min Volatility