(PUB) Morningstar FundInvestor

December 2013

Morningstar FundInvestor

11

Funds We Downgraded Red Flags | Flynn Murphy

Matthews Asia Dividend MAPIX and Matthews China Dividend MCDFX These international funds each saw Analyst Rating downgrades after experienced manager Jesper Madsen announced he would retire. Madsen had been the lead manager of Matthews China Dividend for its first three and a half years before stepping back to comanager in April 2013 and retiring in October 2013 . Madsen’s comanager of one year, Yu Zhang, succeeds him at the fund. Zhang intends to stick with the fund’s focus on buying firms with a commitment to paying and growing dividends over time. The process worked during a relatively short time frame under Madsen: the fund outpaced China-region peers and the MSCI China Index with much less volatility. But given Zhang’s limited experi- ence as a lead manager, the fund’s Analyst Rating was lowered to Neutral from Bronze in August 2013 . Madsen also retired from Matthews Asia Dividend in October. Zhang and Robert Horrocks (a comanager of Silver-rated Matthews Asian Growth & Income MACSX ) succeeded Madsen as co-lead managers. Zhang and Horrocks will work to execute a process that has proved successful thus far. But the loss of Madsen’s experience is still a blow that resulted in the fund’s Analyst Rating dropping to Silver from Gold in July 2013 . Third Avenue Small Cap Value TASCX The long-term results at this small-value fund just haven’t measured up to expectations. Since manager Curtis Jensen took the reins from famed investor Marty Whitman in mid- 2001 , the fund’s returns through November 2013 , fell to the category’s bottom decile. To address particularly poor performance during the trailing five years, Jensen hired three analysts in mid- 2013 —adding to a staff that was previously just Jensen and analyst Charlie Page. While the new hires may spark a change, it’s too little, too late for shareholders who have suffered bottom-quartile performance during the trailing one-, five-, and 10 -year periods. The fund’s Analyst Rating was downgraded to Neutral from Bronze in September 2013 . œ Contact Flynn Murphy at flynn.murphy@morningstar.com

The Morningstar Analyst Rating offers a fundamental look at a fund’s prospects to outperform both its peers and its benchmark over a full market cycle. Analysts review and revise funds periodically and will change Analyst Ratings based on material changes such as a manager departure or general issues such as signs of portfolio bloat or repeated performance shortcom- ings. Here are some funds that have recently seen downgrades in their Analyst Ratings. Calamos Growth CVGRX Recent manager and analyst changes, coupled with a prolonged performance slump, have created uncer- tainties at Calamos Growth. In August 2012 , Calamos hired industry veteran Gary Black to replace the retiring Nick Calamos as co- chief investment officer. Black—one of nine coman- agers at this fund—has driven some big changes at Calamos. Since he arrived, the firm has hired 15 managers and analysts, increasing its investment staff by 50% . Black has also pushed for the histori- cally quantitative-focused team to employ more fundamental analysis. The changes could ultimately prove beneficial, but it’s unclear how the influx of new team members and the change of strategy will impact the fund. It could use a boost—its trailing three-year return through November 2013 lagged nearly all large-growth peers, based partly on poor stock-picking, including investments in struggling gold miners. The fund’s 10 -year return lags three fourths of peers as well. Given the changes to the people and process behind the fund, and its lackluster track record, the fund’s Analyst Rating was reduced to Neutral from Bronze in November 2013 .

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.