(PUB) Morningstar FundInvestor

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Under-the-Radar Favorites Tracking Morningstar Analyst Ratings | Russel Kinnel

Royce Special Equity Multi-Cap RSEMX looks particularly appealing this far into a rally. Manager Charlie Dreifus’ small-cap fund Royce Special Equity RYSEX has always held up well in down markets, and I’m expecting the same from this larger-cap fund. Dreifus is a stickler for good account- ing practices, low valuations, and modest debt. Those are all good things to build into a portfolio when the market slumps. We rate the fund Bronze. Bronze-rated Becker Value Equity BVEFX is run by a good value boutique out of Portland, Oregon. Although Robert Schaeffer just retired, the rest of the team is deep. The team has a rather democratic process where all members have a say in stock selec- tion. The emphasis here is on high return on invested capital and good management. Since its launch in November 2003 , the fund has returned 9 . 3% annualized versus 7 . 3% for peers and 8 . 3% for the Russell 1000 Value Index. The fund’s consistent performance has kept investors in the fold, as evidenced by the fact that investor returns follow total returns pretty tightly. Diamond Hill Small-Mid Cap DHMAX is new to the Morningstar 500 , but if you invest through an advisor you may find a lot to like. This is run by a Columbus, Ohio, boutique with a great record in the Graham and Dodd school. Chris Welch simply wants good busi- nesses at sizable discounts to their intrinsic values. It’s a patient value portfolio with lots of financials and consumer defensive names. We rate it Gold. Silver-rated Champlain Mid Cap CIPMX is another good example of a small-cap manager going up to mid-caps. Lead manager Scott Brayman has built a strong record here, at Champlain Small Company CIPSX , and before that at Sentinel funds. Brayman wants companies that dominate their niche. He looks for companies with high returns on equity and low debt levels. The fund lost less in the 2008 – 09 bear market than the index or peers, as did the small-cap fund. œ

Investors remain cool to equities. Despite a huge five-year rally, fund flows have gone negative for U.S. stock funds in May and June. That’s actually good news if you are in the market for a stock fund. There are quite a few appealing funds with small asset bases. A small asset base enables the manager to invest exactly the way that he or she wants to, and that can lead to strong returns. With that in mind, here are a few hidden gems among our Morningstar Medalists. Silver-rated FPA Perennial FPPFX was sheltered from the world by FPA ’s odd setup. The firm had front loads but no salesforce to get it in front of brokers. That’s one way to remain sheltered from the outside world. However, FPA went no-load, and funds like this conservative mid-growth fund are worth a close look. Eric Ende and Greg Herr are patient growth investors who are too value-conscious to go for high- fliers. Instead, they prefer less-exciting stuff like CarMax KMX and Signet Jewelers SIG . Comanager Steve Geist retired in June, but Ende and Herr should keep things on track. LKCM Equity LKEQX has been overlooked, but this large-cap fund has a strong record of nearly 20 years. Although many investors haven’t heard of LKCM , it has 35 investment professionals in Texas plying a wide-ranging strategy that has held up well in down markets. We give the fund a Silver rating. Since its 1995 inception, the fund has returned 8 . 5% annualized versus 7 . 5% for the Russell 1000 Growth Index and 7 . 05% for the category. Most impressive was its performance in 2008 and 2011 , when it held up much better than its peers. Over the November 2007 to February 2009 bear market, the fund lost 44 . 8% versus 50 . 2% for the average large-growth fund.

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.