(PUB) Morningstar FundInvestor

June 2 014

Morningstar FundInvestor

11

3 Unimpressive Funds Red Flags | David Kathman

gory over the past three, five, and 10 years. Add in expenses that are relatively high across all share classes, and the picture is not pretty. Federated Prudent Bear BEARX Until 2008 , this fund was managed by David Tice, who compiled one of the best track records of any bear-market fund with a strategy that involved selectively betting against individual stocks as well as index futures. Since Federated bought the fund and Tice left, manager Doug Noland has de-emphasized stock-picking, preferring to time the fund’s market exposure through short S & P 500 futures contracts and exchange-traded funds. Although the fund has technically beaten the bear- market category in each of the past five years, that just means that it has lost slightly less than its average category peer in a bull market. Nearly all of those category peers are passive bear funds, many of them leveraged, meaning that they will lose signifi- cantly more than the market gains in an up market. This fund’s active management is supposed to set it apart, but its stock selection has actually hurt returns in recent years. AllianceBernstein International Growth AWPAX This fund has also gone through a lot of changes during the past decade while putting up poor results, with AllianceBernstein frequently adding and subtracting personnel. Seventeen different people have been listed as portfolio managers on this fund at various times since the beginning of 2007 , and two years ago the firm cut back its global- growth analyst team, which now has barely half as many members as it did at the beginning of 2012 . This tinkering has not helped results, as the fund has ranked in or near the foreign large-growth category’s bottom quartile in five of the past six calendar years. In addition, AllianceBernstein as a whole has suffered from instability, outflows, and poor performance, resulting in a Negative Parent rating that contributes to the fund’s overall Negative Analyst Rating. œ Contact David Kathman at david.kathman@morningstar.com

The Morningstar Analyst Rating is a handy way to find great funds that our analysts like, but it can also help identify funds worth avoiding. Funds with an Analyst Rating of Negative have significant problems that cause our analysts to advocate steering clear. These can include instability in personnel or strategy, poor performance, high expenses, or (most com- monly) some combination of these factors. Only a relative handful of funds actually have a Nega- tive Analyst Rating. There are plenty of bad funds out there, but Morningstar’s analyst resources are limited, and so our coverage is heavily skewed toward good funds that interest our readers. Here are a few funds that have been rated Negative so far in 2014 , along with the reasons investors should be wary of them. Russell LifePoints Balanced Strategy RBLEX This fund is part of Russell’s LifePoints funds-of-funds lineup. The lineup includes 10 target-date funds and five target-risk funds, of which this fund is the largest at $ 3 . 7 billion in assets. As in the other LifePoints funds, its portfolio consists of roughly a dozen under- lying Russell funds, each of which, in turn, consists of sleeves run by multiple subadvisors. All in all, there are 80 subadvisors represented in this fund’s portfolio, which targets a roughly 60 / 40 stock-bond allocation. The idea is to allow manager Brian Meath to tailor the portfolio appropriately by finding the best under- lying funds and subadvisors, but there has been a disconcerting amount of turnover, both in the man- agers of the underlying Russell funds and in the subadvisors who manage the sleeves. (Meath himself has only been in place since January 2014 .) Addi- tionally, most of the underlying funds have trailed their peers over the long term, and this fund has trailed the moderate-allocation Morningstar Cate-

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 depar- ture 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 hold- ings. But investors should be prepared for a potentially bum- pier ride in the near future.