(PUB) Morningstar FundInvestor

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Morningstar FundInvestor

June 2 013

Several Funds Raising Fees Red Flags | Greg Carlson

Leuthold Core Investment LCORX , Leuthold Asset Allocation LAALX

These funds have struggled in recent years because of poor stock-picking and mistimed asset-allocation calls. Core Investment has trailed the vast majority of its competitors over three and five years because of stock selection, although its longer-term record is still strong. Asset Allocation has struggled mightily in three of the past four years. Investors have withdrawn a net $ 1 . 17 billion from Asset Allocation and $ 940 million from Core Investment over the past three years, and the funds’ price tags have risen: The expense ratio for Core’s Retail shares increased to 1 . 18% in the January 2013 prospectus from 1 . 11% in 2008 , and Asset Allocation’s retail shares went to 1 . 38% from 1 . 23% over the same period. (The latter fund’s Insti- tutional shares increased 11 basis points in just one year.) Asset Allocation now earns a High fee level. Litman Gregory Masters International Institu- tional MSILX , Litman Gregory Masters Smaller Companies Institutional MSSFX Both of these funds just saw their expense ratios rise. International’s Institutional shares increased to 1 . 15% from 1 . 11% the previous year and from 1 . 03% in 2007 . The fund isn’t much smaller now than it was in 2007 , so the cost difference is odd. Investors pulled a net $ 272 million from the fund in 2012 after a poor 2011 , but flows have since stabilized. Its fee level is Above Average. The price tag for Smaller Companies’ Institutional shares made a big jump between 2007 and 2009 as its asset base shrank dramatically because of in- vestment losses and redemptions. It then dropped a bit, but it has since edged up to 1 . 58% (compared with 1 . 30% in 2007 ). The fund’s fee level is High even among small-cap funds, which tend to be more expensive. œ Contact Greg Carlson at greg.carlson@morningstar.com

A rising market doesn’t mean more assets and corre- spondingly lower fees for all mutual funds. Let’s take a closer look at several funds whose price tags are rising at a time when they don’t need any further headwinds. American Funds Growth Fund of America AGTHX Even the biggest actively managed equity fund in the United States can be buffeted by cash flows. This large-growth fund enjoyed a strong run of relative per- formance from the 2000 – 02 bear market until late in the mid- 2000 s equity rally, and its asset base peaked at roughly $ 200 billion. Returns have since cooled— its trailing three- and five-year returns are mediocre— and investors have pulled out a net $ 80 billion over the past three years through April 2013 . As a result, assets are down to a still-massive $ 121 billion. The expense ratio for the fund’s A shares increased to 0 . 71% in 2012 from 0 . 62% in 2008 , although that share class still earns a Morningstar Fee Level of Low. Calamos Growth CVGRX This fund also has seen hot money flow out and costs rise as relative returns have waned. It hit $ 20 billion in assets in early 2006 as investors poured money in following stellar returns. But Calamos Growth has since seen seven consecutive years of net outflows (more than $ 1 billion each year, and more than $ 4 billion in 2007 ) as the fund has largely struggled—it landed in the bottom decile of its category in four of those seven years, and it is there again in 2013 for the year to date through May 31 , 2013 . The A shares’ expense ratio has consequently risen to 1 . 29% in 2012 from 1 . 20% in 2007 , which means that it earns an Above Average fee level despite a still-substantial $ 4 . 9 billion asset base.

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 departure 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 holdings. But investors should be prepared for a potentially bumpier ride in the near future.