(PUB) Investing 2015

11

October 2015

Morningstar FundInvestor

These Funds Are Not Worth the Price Red Flags | Russel Kinnel

Marsico Growth MGRIX Is Tom Marsico worth paying a premium? No; he has a strong 30 -year record, but it’s been a long time since he consistently outperformed. The fund charges 1 . 37% —that’s more than double Primecap Odyssey Growth ’s POGRX expense ratio. A sharp drop in firm assets under management and some key departures add to Marsico’s challenges. Once again, this is a fund with some appeal, but not enough to make it a good bet. However, poor performance led to a big exodus and that in turn led to higher costs. The fund charges 1 . 37% , which is fairly pricey for a large-cap fund. The fund has had quite a bit of manager turnover—two have left in the past five years, and Rob MacDonald joined Connor Browne in February 2015 . Browne is fairly seasoned, but this is more or less MacDonald’s first go at management outside of a short stint at another fund. It’s nice to see the fund outperform nearly all its peers this year thanks to Google GOOG , Mondelez MDLZ , and Gilead Sciences GILD , but we need more than a good nine months to recom- mend the fund. Thornburg Value TVAFX This fund is on the rebound after a disastrous stretch. Gabelli Asset GABAX If only you could tap Mario Gabelli the portfolio manager without having to pay Mario Gabelli the CEO . Gabelli is an outstanding investor focused on cash flow and stable franchises. However, he is one of the highest-paid CEO s in the fund industry despite running a very small firm. So, that means high fees to the tune of 1 . 35% . In addition, Gabelli hasn’t done a good job of keeping good investment profes- sionals around him, so this unrated fund has quite a bit of key-man risk. That’s industry jargon that means there could be a big drop in talent should the manager step aside. K

We don’t have any really pricey funds in the Morningstar 500 , but there are some with above- average fees. I looked for funds with above- average expense ratios and either a Morningstar Analyst Rating of Neutral or no rating. They clearly have some appeal or I wouldn’t have them in the Morningstar 500 , but the odds aren’t so great with these funds. A choosy investor can do better. Eventide Gilead ETGLX This is the best performer on the list and, therefore, probably the most tempting. But it charges an expense ratio of 1 . 45% , and its high turnover rate likely means it racks up above-average brokerage costs. Manager Finny Kuruvilla also faces the chal- lenge of managing a much larger fund than he had been running. The fund has had inflows of $1 . 1 billion, which drove assets up to $1 . 8 billion. The strategy combines Christian screens and an aggres- sive-growth strategy. It will be interesting to see if the fund’s success is sustainable, but its fees will make that a real challenge. Royce Micro-Cap RYOTX This fund charges 1 . 48% in expenses—that’s pretty high for a small-blend fund, though not so extreme compared with others that focus on micro-caps. Micro- caps don’t cost more to research, but funds that focus on them generally have to close at a lower asset base than other small-cap funds, so there are fewer economies of scale to share. We don’t rate the fund, but its poor five- and 10 -year records don’t make it a compelling option. Its returns lag DFA US Micro Cap DFSCX by a wide margin, so we can’t blame micro- caps, either. Manager Jennifer Taylor has been at the helm for nine years, and she at least deserves credit for investing more than $1 million of her own money in the fund.

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.