(PUB) Morningstar FundInvestor

How Bloated Is Your Fund? Continued From Cover

2

29% to 51% for the other quintiles. In addition, pre- expense returns of the funds that survived the ensuing period were a little lower for the lowest-bloat funds and highest for the highest-bloat funds. Likewise, the subsequent Morningstar Rating over the next five years was a bit lower for low bloat than high- bloat funds. However, in the next five-year period, the bloat ratio performed quite well. The lowest-bloat funds re- turned 3 . 6% annualized, a figure that topped all the other groups. In addition, the success rate was 57% while all the other quintiles were in the 30% – 40% range. In addition, the ensuing five-year star rating was best for low-bloat and worst for high-bloat funds. Why did it work in the more recent period but not the earlier one? I’m not sure. Maybe the safe conclu- sion is that it’s modestly helpful but not strong enough to work over every period.The first time period didn’t have a down market and the second one did. Maybe there’s some link, but I can’t be sure. Which Funds Have Maximum Flexibility? Some Morningstar 500 funds have very low bloat ratios. That means they have room to grow. Westport WPFRX has a Morningstar Analyst Rating of Gold and a bloat ratio of just 0 . 0037 , placing it in the lowest 10% of its category. With a 1% turnover rate and $ 652 million in assets, it’s easy to see why. It’s run by the patient Ed Nicklin, who looks for cheap stocks but will keep holding as their multiples grow. Nicklin’s emphasis on cheap, high-quality names gives the fund an appealing defensive quality. Vanguard Explorer Value VEVFX is a small fund— $ 271 million with three subadvisors. Its 0 . 09% bloat ratio is in the lowest third of its category. The sub- advisor split means the fund isn’t going to have any big positions and thus has the benefit of a lot of flex- ibility. It also boasts a low 0 . 60% expense ratio and a 4 -star rating. We don’t have an Analyst Rating on it. The fund is promising, though its bloat ratio is a bit deceptive as the three subadvisors run similar small- cap strategies on their own. That means they are

having a bigger impact on stock prices than would be apparent from this small fund alone.

FPA Perennial FPPFX switched to no-load last year, and it’s worth a close look. Its 0 . 02% bloat ratio ranks in the lowest 26% of the category. This Gold-rated fund has enjoyed strong performance under Eric Ende and Steve Geist, yet the load and a lack of salesforce kept assets at just $ 311 million. Along with recently added comanager Greg Herr, the managers tend to build positions slowly and thus trading costs low. They look for companies with a high return on capital and low debt. That makes this one of the tamer mid- growth funds. Auxier Focus AUXFX is another small, patient fund. The fund’s 0 . 005% bloat ratio is in the large-value category’s lowest 30% . Jeff Auxier employs a Buffett- influenced strategy in which he seeks companies with wide moats and modest prices. He tends to hold a slug of cash for rainy days. Lately the fund has been lagging in the market’s rapid ascent, but it’s always a good bet in a downturn. FAM Value FAMVX is another fund that earns its keep in down years. The value proposition is that you get near-market returns with below-market risk. The fund lost 8 percentage points less than the S & P 500 in 2008 and 2 . 5 percentage points less in 2001 . The fund’s $ 940 million asset base and single-digit turn- over rate give it a bloat ratio of 0 . 05% , which is in the bottom 40% of its peer group. Which Lack Flexibility? Many of the funds with the largest bloat ratios are no surprise as they have huge asset bases. Funds like Fidelity Contrafund FCNTX and American Funds Growth Fund of America AGTHX have very high bloat ratios—something that’s already factored into the Analyst Rating for the funds. Others like the frenetic CGM Focus CGMFX are no surprise, either.