(PUB) Investing 2015

22

Funds From Invesco and DFA Join Morningstar 500 Changes to the 500 | Russel Kinnel

Although the word “targeted” might make you think of “focused,” the fund actually owns about 1 , 500 stocks. The fund is different from an index fund in that it doesn’t try to precisely match an index. Rather, it takes a more flexible approach that allows it to trade stocks when there is an eager buyer or seller willing to give up most of the bid/ask spread. That trading strategy makes the fund a better bet than most small- and mid-cap index funds. Meantime, Turner Midcap Growth has been dropped from coverage. It has steadily been on the decline in performance and assets, mirroring what’s happened at parent company Turner Investments. The firm has fallen from $28 billion under management in 2008 to $600 million today. That’s not a good sign for this fund. Speaking of dismal performance, Royce Low Priced Stock has been pretty dreary. The 1 -star fund changed managers in November 2014 , replacing Whitney George with Jim Stoeffel. Stoeffel has his work cut out for him as the fund has had bottom-decile returns for the past one-, three-, five-, and 10 -year periods. K

I am adding two funds and dropping two. The new entrants, with a Morningstar Analyst Rating of Silver, are Invesco Diversified Dividend LCEAX and Gold- rated DFA US Targeted Value DFFVX . To make room, I am culling the small and disappointing Royce Low Priced Stock RYLPX and Turner Midcap Growth TMGFX . Invesco Diversified Dividend has been a steady value fund under Meggan Walsh. The fund is in the top quintile of large-value funds for the trailing three-, five-, and 10 -year periods. Since Walsh took over in December 2002 , the fund has returned an annualized 9 . 5% , versus 7 . 8% for the Morningstar Category and 8 . 9% for the Russell 1000 Value through Oct. 31 , 2015 . Although dividends matter, the fund places greater emphasis on finding companies with strong balance sheets and healthy free cash flows. That gives the fund greater defensive characteristics than typical equity-income funds but a little lower yield. The fund’s steady track record has helped it to grow to $12 billion in assets under management. I’m also adding DFA US Targeted Value, which is a passive small-value fund. I’m drawn by the fund’s low 0 . 37% expense ratio, which makes it the cheapest of DFA ’s small-cap funds. It’s actually a small/mid-cap fund. It aims to own the cheaper half of small- and mid-cap stocks based on price/book. It also tosses out the least profitable companies of that subset, and it excludes heavily regulated businesses such as utilities. The A shares have a 0 . 83% expense ratio and a 5 . 5% front load. See the facing page for more details.

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

DFA US Targeted Value

Royce Low Priced Stock

Invesco Diversified Dividend

Turner Midcap Growth

Rating Change (Upgrade)

From

To

T. Rowe Price International Discovery

´ •

Rating Change (Downgrades)

From

To

Fidelity Leveraged Company Stock

• ´ ´ ‰ ´ ‰ ´ ‰ ´ ‰ • ´

GoodHaven

MainStay ICAP Equity I

MainStay ICAP International I

MainStay ICAP Select Equity I

Royce Premier Invmt

Rating Change (Under Review)

From

To

Vanguard Energy Inv

Œ ˆ