(PUB) Morningstar FundInvestor

February 2 014

Morningstar FundInvestor

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Don’t Chase These Hot Performers Red Flags | Shannon Zimmerman

the three- and five-year trailing periods, the fund’s total returns as well as its dollar-weighted investor returns rank in the peer group’s 99 th percentile. CGM Focus remains a fund best admired from afar. Fidelity Blue Chip Growth Since July 2009 , former tech analyst and Fidelity OTC FOCPX manager Sonu Kalra has led this large- growth fund. Thus far on his watch, the fund has fared well when equity prices rise, and 2013 was no exception. Last year, the fund gained 39 . 8% , sur- passing the peer group norm by 5 . 9 percentage points and the benchmark Russell 1000 Growth Index by 6 . 4 points. The trade-off has been poor performance during declines. While Kalra hasn’t faced a sus- tained sell-off during his time at this fund, a down- capture ratio of 125% versus the index doesn’t inspire confidence. Nor does Fidelity OTC ’s bottom- quintile showing in 2008 with Kalra at the helm. The fund does look considerably better versus typical peers. Its losses still have been steeper during market declines, and performance swings have been wider than both the bogy’s and the category norm’s. Overall, this is a middling fund in a competitive category. Thornburg Value Connor Browne and Edward Maran have been coman- agers on this large-blend fund since February 2006 . Until 2010 , though, they worked alongside lead manager Bill Fries. As a duo, their track record is both relatively short and, during market declines, disas- trous. The fund got pummeled in the third quarter of 2011 , shedding 22 . 5% versus losses of 15 . 8% for the typical peer and 13 . 9% for the S & P 500 Index. While the fund has been a modest outperformer in rising markets since Fries left, it also has suffered 150% of the bogy’s declines and 141% of the category’s. That said, the fund’s performance has improved since the managers reined in its risk profile in mid- 2012 . Since then, the fund has topped the index and the category norm in five of six quarters. That’s encouraging, but more time is needed to see if that success can be sustained, particularly in light of Maran’s planned April 1 exit. œ Contact Shannon at shannon.zimmerman@morningstar.com

The Morningstar 500 includes 54 funds with Morning- star Analyst Ratings of Neutral, an indication that the analysts who cover them believe their prospects for outperformance over the course of a full market cycle are poor or at least unclear. In the short run, though, even middling (or worse) funds can have a great year. That was true in 2013 , a year in which seven Neutral- rated Morningstar 500 funds managed to earn spots in the top decile of their respective peer groups. Each of the funds highlighted below— CGM Focus CGMFX , Fidelity Blue Chip Growth FBGRX , and Thornburg Value TVAFX —were among the M 500 ’s Neutral-rated overachievers. Current investors should obviously be pleased with these funds’ results last year, but as detailed below, prospective inves- tors giving them a fresh look because of recent suc- cess continue to have superior options among the M 500 ’s Medalists. CGM Focus During the past decade, Ken Heebner’s fund has gone virtually everywhere, roaming the Morningstar Style Box from small blend to large growth. The fund currently resides in the large-blend category, but for better or worse, CGM Focus is peerless. As of Sept- ember 2013 , it had long and short positions, with U.S. stocks exposure of roughly 130% and a 35% short stake in bonds. That proved deft in 2013 , with the fund gaining 37 . 6% for a spot in the category’s top decile. Its 15 -year track record is even more impressive. In that period through 2013 , its 14 . 3% annualized gain ranks in the category’s top percentile. Heebner deserves credit for what he’s achieved over the long haul, but it’s tough to assess the repeat- ability of a process that’s less a strategy than a series of opportunistic lurches and extreme portfolio make- overs. Outsized volatility and erratic performance patterns have made the fund difficult to use well. In

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.