(PUB) Investing 2016

13

October 2016

Morningstar FundInvestor

JOHCM International Surges Leaders & Laggards | Andrew Daniels

Laggards Bronze-rated Sequoia SEQUX has lagged 99% of its large-growth peers in 2016 —it is down 10 . 1% , compared with the S & P 500 benchmark’s 7 . 8% gain. While the fund’s concentrated nature contributed to its long-term success, it also brought risks that ultimately came back to bite. Nearly all of the under- performance this year can be explained by its huge position in Valeant Pharmaceuticals VRX , which plummeted about 80% in the first half of 2016 over questions about its business strategy. The fund sold its Valeant stake in the second quarter. Gold-rated Causeway International Value CIVVX has underperformed 86% of its foreign large-blend peers for the year to date. The fund’s managers are contrarians, often favoring firms that are in the midst of a short-term crisis or transition. That mind- set led to sizable exposure to several poor-performing European banks: Barclays BARC , Lloyds Banking Group LLOY , and UBS Group UBSG are all down more than 30% this year. The fund’s exposure to airlines also dented results— International Consolidated Airlines IAG , Ryanair Holdings RYAAY , and Japan Airlines are all down double-digits this year. TCW Total Return TGLMX has struggled this year, underperforming 85% of its intermediate-term bond peers. The fund’s lack of exposure to strong- performing investment-grade corporate bonds as well as its below-average duration has dragged on results. Additionally, its above-average nonagency stake has hurt the fund. K Contact Andrew Daniels at andrew.daniels@morningstar.com

Leaders Royce Pennsylvania Mutual PENNX , with a Morningstar Analyst Rating of Neutral, has been a top performer for the year to date, outperforming 93% of its small-blend peers. The fund’s emphasis on firms with higher returns on invested capital and low debt means its exposure to biotech and real estate investment trusts is limited. That underweighting to biotech stocks, as well as solid stock selection else- where in healthcare, helped results. The fund has also benefited from solid picks in technology and consumer cyclicals: computer hardware firms Cognex CGNX and Coherent COHR as well as auto suppliers Drew Industries DW and Thor Industries THO are all up more than 50% this year. JOHCM International Select JOHAX has outper- formed 99% of its foreign large-growth peers thus far in 2016 . The fund’s significant overweighting to high-flying basic-materials stocks—amounting to 22% of assets as of June 2016 —has contributed to results. Within basic materials, metals and mining firms such as Newcrest Mining NCM , South32 , and Franco-Nevada FNV are all up more than 50% this year. Stock selection in the consumer cyclicals space—such as apparel firm Adidas ADS and video- game developer CyberAgent CYAGF —also drove results. Furthermore, the fund has no exposure to poor-performing banks stocks, which have continued to struggle during this near-zero interest- rate environment. Neutral-rated USAA Income USAIX has excelled thus far in 2016 , outpacing 97% of its intermediate-term bond peers. The fund typically has heavier exposure to lower-level investment-grade corporate bonds than its peers, and those have done well this year. Further- more, the fund’s overweighting to basic materials and energy corporate bonds have helped it this year as commodity prices rebounded.

10 Best-Performing Funds

Fund Name

YTD Cat Rank %

Artisan Value Investor Champlain Mid Cap Adv

1 1 1 1 1

Longleaf Partners

Mairs & Power Growth Inv Permanent Portfolio Perma Vanguard High-Yield Tax-E 1 Champlain Small Company A 2 Fidelity New Millennium 2 Franklin Income A 2 JOHCM International Selec 2

10 Worst-Performing Funds

Fund Name YTD Cat Rank % Artisan International Sma 100 Matthews China Investor 100 Matthews India Investor 100 FPA US Value 99 Sequoia 99 Litman Gregory Masters In 98 Oakmark Global I 98 Scotia Dynamic U.S. Growt 98 Touchstone Sands Capital 98 Dreyfus Opportunistic Sma 97