(PUB) Investing 2016

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Strategy Tweak Prompts a Downgrade at Weitz Value Changes to the 500 | Russel Kinnel

big financials bet in 2007 . The changes won’t likely be dramatic, but the fund is venturing from the formula that it has used for a long time. Neuberger Berman International Equity NIQVX was upgraded to Silver from Bronze on April 20 because we’ve been increasingly impressed by manager Benjamin Segal. He plies an all-cap strategy in which he seeks strong sustainable growth rates, healthy balance sheets, and good management. Segal has built an impressive track record since 2003 , though it is obscured by the fact that Neuberger Berman merged two funds run by Segal, keeping the one with the shorter record. Fidelity Capital Appreciation FDCAX was downgraded to Neutral from Bronze because of concerns about manager Fergus Shiel’s rather improvised strategy. He looks at a wide array of fundamental and technical information to get ahead of a stock move in the half- year to year range. Essentially he’s more of a trader than an investor, albeit a skilled one. We decided his flexible approach was not enough of a sustainable advantage to merit a Morningstar Medalist rating. T. Rowe Price Small-Cap Stock OTCFX was lowered on April 12 to Neutral from Silver because of Greg McCrickard’s pending retirement. He retires in October 2016 and will be replaced by Frank Alonso at that time. We don’t have much of a track record for Alonso, however. We’re confident he won’t stray too far from McCrickard’s strategy, but his execution remains an unknown. K

There are no coverage changes this month, so let’s get caught up on Morningstar Analyst Ratings changes. I’ll tackle them from most recent to oldest. Franklin High Yield Tax-Free Income FRHIX was downgraded to Bronze from Silver on May 31 partly because of concerns that management did not get completely out of deteriorating bonds over a long span of time. The team’s still-meaningful weights in strug- gling Puerto Rico debt and middling returns relative to peers precipitated the move. The fund’s Puerto Rico exposure was as high as 6% in 2014, and depreciation and selling took it down to 3%. But the firm merged a Puerto Rico-heavy fund, Franklin Double Tax-Free Income, into this fund in April 2016, which boosted its Puerto Rico exposure to 3.8%. Morgan Stanley Institutional Growth MSEGX was lowered to Silver from Gold. While we still like Dennis Lynch and his team, the fund packs quite a lot of risk. It has a focused portfolio, with a big 38% weighting in social-media stocks such as Facebook FB , LinkedIn LNKD , and Twitter TWTR . That amount has grown as those stocks have rallied. Lynch’s strategy is to seek out companies that dominate their markets and earn high returns on capital. It’s worked well over time, but its concentration in highfliers suggest you shouldn’t buy it for a time horizon of less than 10 years. Weitz Value WVALX was downgraded to Bronze from Silver on May 19 because of a strategy shift. Responding to poor performance, management has cut the discount rate it uses to value companies to 9% from 12% . It did this to enable it to buy more high-quality companies, as those names rarely get cheap enough to qualify under the old standard. Managers Brad Hinton and Dave Perkins have seen the fund burned by value traps, including a

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

Rating Change (Downgrades)

From

To

Franklin High Yield Tax-Free Inc

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Morgan Stanley Inst Growth

Weitz Value Investor

New Ratings

To

Ariel International Investor

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Seafarer Overseas Gr and Income

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