(PUB) Morningstar FundInvestor

September 2 014

Morningstar FundInvestor

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flat. Asset-weighted expense ratios count bigger funds proportionally more than smaller ones. To be fair, MainStay Marketfield’s fees have dropped from 1 . 81% in 2009 , but given how high they started, they still have a long way to go before they’ll look cheap relative to peers. Arani: Stocks More Appealing Than Bonds Fidelity Puritan FPURX manager Ramin Arani stopped by our offices, and I had a chance to inter- view him on the fund and markets. Russ Kinnel: Is running the equity sleeve of a balanced fund different from running just an equity fund without a bond sleeve attached? Ramin Arani: For the last seven years before I ran Puritan for the last five, I ran an equity-only fund: Fidelity Trend FTRNX . In some ways, that was very different because all I had to do was worry about what equity investments to populate the fund with. While Puritan is a balanced fund, I have to set the asset allocation between equities, investment-grade fixed income, and high-yield fixed income. Within that, when I run the equity subportfolio, it’s a little bit different from when I ran Trend. Though I would say my fundamental philosophy in process is the same. I continue to look for companies that are going to show better earnings growth and more earnings power over time than the market expects. It’s exactly what I did when I ran Trend; that’s also how I invest the equity assets of Puritan. That being said, the neat thing about Puritan being a balanced fund is that you can think about the invest- ment-grade subportfolio as providing a nice base level of income for shareholders of the fund. Think of it like the foundation of a house. In tough times, the foundation will be there, it will be the bedrock, it won’t lose you capital, and it should generate at least a couple of percent of income. Then, think about the equity subportfolio as the main floor of the house. It layers on earnings growth and dividend growth over time, which should then [bring in]—for the shareholder and the fund—nice growth and capital appreciation on top of the income. Then,

think about the high-yield component of the fund as an opportunistic kicker.

So, when the opportunity presents itself, [the high- yield component] can add the penthouse pool to the house—some neat feature that really makes the house exciting when the opportunity presents itself. Given that construct, as I build the equity subport- folio, I think about it within that framework, which is obviously different than if you were just running an equity fund. Kinnel: You’re also setting the asset allocation, which is different. I know the fund starts with a neutral 60% / 40% stock/bond mix. Where are you today? And what led you to that current weighting? Arani: The neutral allocation is about 60% equities and 40% bonds. You should think about the fund oper- ating within a 10 -point band around those neutral points. So, thinking about the equity subportfolio: If I’m less positive on equities, [the percentage of equi- ties in the portfolio could be] less than 60% all the way potentially down to 50% ; if I’m more positive on equities than bonds, you should think about the equity subportfolio being as much as 70% as opposed to a neutral 60% —obviously, there is room in between. Really, since the spring of 2009 , the fund has been overweight on equities; it’s been more than 60% equities. In the last two years, it’s been over 65% equities. In the last year-plus, it’s been about 70% equities. So, I’ve clearly favored equities for the last five years and even more so in the last two—really since the summer of 2011 , which was a bit of a choppy period. Coming out of that, I began to feel much more positive about equities relative to bonds. So, that’s been the allocation for the last couple of years, which has served the fund shareholders well. As we sit here today, I’m no longer at max 70% [equi- ties]; I’ve eased off of that a bit. But certainly as I look at relative fundamentals and relative valuation, I think it favors equities over bonds over the next two to three years. œ