May 2, 2013
By Michael Herbst – Director of Active Funds Research with Morningstar
January 3, 2013
Despite a steady stream of harrowing news—euro crisis, faltering economy, midyear market swoon, fiscal cliff—the markets had another strong year in 2012. Stocks continued to rally, as emerging-markets equities (as measured by the MSCI Emerging Markets Index) led the way with an 18% gain. International developed-markets equities and domestic stocks weren't far behind, with the MSCI EAFE and S&P 500 indexes up 17% and 16%, respectively. Investors' thirst for income and yield fueled strong returns for riskier bonds, with investment-grade corporate fare, high yield, and emerging-markets debt posting high-single-digit to nearly 20% gains and trumping government bonds.
No single bets propelled our Morningstar Fund Managers of the Year to the top of their categories, but if there is a unifying trait, it's that they're generally more willing to protect investors on the downside than to try to wring out that last penny of gains amid rising risks. Historically we've offered Fund Manager of the Year awards for managers investing in domestic stocks, international stocks, and fixed income. This year we introduce awards in two new categories—alternatives and allocation (for managers investing across multiple asset classes)—recognizing investors' growing interest in those areas.
Beyond a great year, our winners must be Morningstar Medalists, have generated strong long-term risk-adjusted returns, and be strong stewards of investor capital. While our Fund Manager of the Year awards are recognition of past contributions rather than predictions of future results, we're confident in each one's long-term prospects in part because of their deep research resources and willingness to stick with their discipline in good times and bad.
Bill Frels and Mark Henneman
Mairs & Power Growth (MPGFX)
Morningstar Category: Large Blend
2012 Return / Category Return Rank: 21.9% / 3
Morningstar Analyst Rating: Silver
This $2.5 billion fund scored big wins in two of the tougher sectors in 2012—basic materials and industrials—with long-held positions such as Valspar (VAL), Toro (TTC), Pentair (PNR), and H.B. Fuller (FUL). Yet strong performance came across sectors, including wins with Baxter (BAX) and MTS Systems (MTSC).
Skippers Bill Frels and Mark Henneman have a penchant for companies located within a stone's throw of the fund's St. Paul, Minn., office, yet many of those have a national or global footprint. The duo values firsthand interaction with company management teams, but ultimately it seeks profitable growers with sustainable competitive advantages and sells when valuations look rich. The fund is generally heavier on the basic materials, health-care, and industrials sectors versus its S&P 500 Index benchmark. It's also lighter in technology and consumer cyclical stocks and offers little or no exposure to energy, telecom, or real estate.
Those traits and management's ken for the slow and steady mean the fund might not keep up in sharp equity market rallies, but strong downside protection is one of its hallmarks. The fund held up better than most of its large-blend rivals in late 2012's swoon, and over the trailing decade it has captured only 85% of the S&P 500's losses. Because of that protection and management's strong stock selection, the fund has outpaced the S&P 500 in more than 90% of the rolling five-year periods over the trailing decade through December 2012. Its cumulative return since Jan. 1, 2000, is 198% compared with 31% for the S&P 500.
Virtus Foreign Opportunities (JVIAX)
Morningstar Category: Foreign Large Growth
2012 Return / Category Return Rank: 19.8% / 28
Virtus Emerging Markets Opportunities (HEMZX)
Morningstar Category: Diversified Emerging Markets
2012 Return / Category Return Rank: 19.6% / 39
Morningstar Analyst Ratings: Silver
Rajiv Jain plies a similar approach at his two charges: fairly concentrated, little overlap with his benchmarks (less than 15% as of late), and a relatively cautious growth style. In both the $6.7 billion Virtus Emerging Markets Opportunities and the $1.3 billion Virtus Foreign Opportunities, he holds 50-60 positions, with roughly 40% of assets parked in his top 10. He favors a mix of consumer-leading Indian stocks and global firms with a big emerging-markets footprint. In Foreign Opportunities, he keeps one foot in emerging markets (nearly 20% of assets as of Sept. 30, 2012) but maintains a broader mix of consumer staples, financial services, and health-care stocks.
Jain's emphasis on India was a tailwind this year, as the average India-equity fund gained 27.5% in 2012. Yet a number of his largest Indian positions far surpassed that average, such as ITC (ITC), Housing Development Finance (HDFC), and Hindustan Unilever (HINDUNILVR). In addition, both his funds did relatively well in 2011 when owning India was a huge headwind, which is a further testament to his picks. Lastly, wins from non-India stocks such as SABMiller (SAB) and HSBC Holdings (HSBA) rounded out Emerging Markets Opportunities' gains, as did UBS (UBS), Novo Nordisk (NOVO B), and Anheuser-Busch Inbev (ABI) for Foreign Opportunities. The funds' valuation metrics such as price/earnings tend to land above the benchmarks' and average category peers' (reflecting a dose of price risk), but Jain's preference for conservative accounting and his aversion to speculative growth stories have kept both funds in good stead over the long haul. On both an absolute and Morningstar Risk-Adjusted basis, his two funds beat 90% of their peers over the trailing three-year period, two thirds of the competition over the trailing five-year period, and four fifths of their rivals over the trailing 10-year period.
PIMCO Investment Grade Corporate Bond (PBDAX)
Morningstar Category: Intermediate-Term Bond
2012 Return / Category Return Rank: 15.0% / 2
Morningstar Analyst Rating: Silver
This $9.6 billion fund focuses on investment-grade corporate bonds more than many of its intermediate-term bond peers do, and the credit selection of skipper Mark Kiesel and his analyst team was a driving force behind the fund's stellar 2012. Kiesel's long-standing positions in banks and overweighting to the energy sector relative to his Barclays U.S. Credit Index benchmark both paid off. Yet the fund's top performers crossed sectors and security types, including contingent capital securities issued by Lloyds (LLOY), bonds from Weyerhaeuser (WY), Gazprom (OGZPY), and TNK-BP, and enhanced equipment trust certificates issued by AMR (AAMRQ).
Despite the fund's emphasis on corporate credit, Kiesel can lean on other sectors—including mortgage, developed sovereign, and emerging-markets sovereign debt—to mitigate risk or scoop up opportunities. For instance, he added exposure to short-maturity Italian and Spanish government bonds last summer after the ECB announced its support for that part of the market, which he thought presented better value than corporate debt in those countries. Such moves in part reflect PIMCO's top-down firmwide views, but this past year and over the long term, Kiesel has managed that top-down/bottom-up balance extremely well.
There are a handful of intermediate-term bond funds that offer "purer" investment-grade corporate-bond exposure, yet Kiesel outpaced virtually all of them on an absolute basis—and beat all of them on a Morningstar Risk-Adjusted basis—over the trailing three-, five-, and 10-year periods through December 2012. If corporate-bond yields continue to shrink, this fund's deep research resources across sectors and extra dose of flexibility should be welcome.
Eric Newman, Kevin Gates, Larry Eiben, Richard Gates, Chao Chen, and Yan Liu
TFS Market Neutral (TFSMX)
Morningstar Category: Market Neutral
2012 Return / Category Return Rank: 7.8% / 1
Morningstar Analyst Rating: Gold
These managers are the recipients of our first Alternatives Fund Manager of the Year award, as the team far outpaced its market-neutral category rivals on both an absolute and risk-adjusted basis (as measured by its Sharpe ratio). The skippers ply a long/short strategy focusing on small-cap stocks and exchange-traded funds and—to a much lesser degree—long-only positions in closed-end funds. It maintains a $1 long/$0.66 short ratio and aims to keep the fund's beta at or under 0.3 relative to the S&P 500. Those traits set the fund's strategy apart from some of its market-neutral peers that target a 0.0 beta, but the fund's beta relative to the Russell 2000 (a more appropriate benchmark given the fund's small-cap focus) weighed in at 0.04 in 2012, suggesting its net equity market exposure didn't give the fund a huge boost this past year.
That's not to say the fund's slightly different take on market neutrality is flawless. For instance, its bottom-decile loss in 2008 stemmed in part from its net market exposure and holdings that sold off en masse that year. Yet, thus far, the fund's 7.9% annualized gain since its September 2004 inception through December 2012 tops the category on a Morningstar Risk-Adjusted basis and bests both the Russell 2000 and S&P 500, with roughly half the volatility (as measured by standard deviation).
The fund stands apart from many of its alternatives rivals in other ways as well. The fund's advisor, TFS Capital, mandates that each portfolio manager invests at least 50% of his liquid net worth in TFS funds; that requirement means its skippers are paying the same high 2.5% expense ratio as fund shareholders. Management has also done right by current shareholders by closing the fund to new investors several times. (At $1.8 billion in assets, it is currently closed.) Investors seeking less-correlated long/short strategies should keep this one on their radar should it reopen in the future.
T. Rowe Price Capital Appreciation (PRWCX)
Morningstar Category: Moderate Allocation
2012 Return / Category Return Rank: 14.7% / 8
Morningstar Analyst Rating: Gold
This is the first year we've considered allocation funds for Fund Manager of the Year honors, and manager David Giroux has found success in adjusting this fund's overall allocation and tweaking its asset mix. He generally keeps 55%-65% of assets in stocks, with a single-digit stake in non-U.S. stocks. (As of Sept. 30, the fund's stock sleeve weighed in at 62% of its $13.7 billion in assets.) On the fixed-income side, he's favored convertible bonds in the past, but more recently he's leaned on leveraged bank loans to the tune of roughly 10% of assets. Giroux tends to not hold a big cash stake, but he'll hold cash in lieu of more-attractive opportunities, as he's done lately (11.2% of assets). He also generates a dash of income by writing covered calls on a number of holdings.
Each of the fund's sleeves contributed to its performance in 2012. Bank loans had a strong showing, with the average bank-loan fund notching a 9.4% gain for the year, and this fund getting a big boost from its bank-loan position in Dunkin Brands (DNKN) in particular. Wins on the stock side came from multiple sectors, including top holdings Thermo Fisher Scientific (TMO), Apple (AAPL), Walt Disney (DIS), and Invesco (IVZ). The fund's cash stake buffered the portfolio during the fourth quarter's stock market dip. In spirit, the fund could be viewed as a largely domestic-stock fund with ample breathing room to dial up or dial down equity risk, so its S&P 500 benchmark is a decent but not perfect yardstick. The fund's fixed-income and cash exposure mean it is likely to lag that bogy in sharp equity market rallies, but Giroux has done an admirable job since taking the helm in June 2006. Over the trailing five-year period through December 2012, the fund's 5.5% annualized gain outpaced the S&P 500's 1.7%, with one-fifth less volatility. Over that stretch, it captured 69% of the S&P 500's downside—on par with its average moderate-allocation peers—but 84% of its upside, or 14 percentage points more than its typical rival.
When considering mutual funds, investors should look beyond historical performance. They should consider factors such as the fund's investment objective, the types of securities in which it invests, and its level of risk compared with other types of investments. There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them.
The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.
Download a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
|Periods Ended September 30, 2013|
||5 Years /
|10 Years||Since Inception||Inception Date|
|T. Rowe Price Capital Appreciation Fund||17.28||10.90/14.31||9.56||11.40||6/30/1986|
|Morningstar Moderate Allocation Fund Average||11.87||7.94/13.12||6.32||6.62|
|S&P 500 Index||19.34||10.02/17.93||7.57||9.73|
|Morningstar Category Rank||43||16||4||1|
|# of Investments Ranked in Morningstar Category||912||700||427||34|
Current performance may be higher or lower than the performance data quoted, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. Click here for the most recent month-end performance information.
The Capital Appreciation Fund received a Morningstar Gold RatingTM as of 11/28/12.
The Morningstar Analyst Rating is not a credit or risk rating. It is a subjective evaluation performed by the mutual fund analysts of Morningstar, Inc. Morningstar evaluates funds based on five key pillars—process, performance, people, parent, and price. Morningstar's analysts use this—evaluation to identify funds they believe are more likely to outperform over the long term on a risk-adjusted basis. Analysts consider quantitative and qualitative factors in their research, but the assessment of each of the pillars and how they are combined is driven by an analyst's overall assessment and overseen by Morningstar's Analyst Rating Committee. The approach serves not as a formula but as a framework to ensure consistency across Morningstar's global coverage universe.
The Analyst Rating scale ranges from Gold to Negative, with Gold being the highest rating and Negative being the lowest rating. A fund with a Gold rating distinguishes itself across the five pillars and has garnered the analysts' highest level of conviction. A fund with a Silver rating has notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction. A Bronze-rated fund has advantages that outweigh the disadvantages across the five pillars, with a sufficient level of analyst conviction to warrant a positive rating. A fund with a Neutral rating isn't seriously flawed across the five pillars, nor does it distinguish itself very positively. A Negative-rated fund is flawed in one or more pillars and is considered to be an inferior offering to its peers. Analyst Ratings are reevaluated every 14 months. For more detailed information about Morningstar's Analyst Rating, including its methodology, please go to http://corporate.morningstar.com.
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The fund's average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions.
Standard Deviation is a statistical measure of the historic volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, it is a measure of the extent to which numbers are spread around their average. The wider the dispersions, the larger the standard deviation. The higher the deviation, the greater the volatility. This is an independent measure of volatility; it is not relative to an index.
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As of 9/30/13, the Capital Appreciation Fund held shares of Thermo Fisher Scientific, Apple, and Walt Disney. These securities represented 4.1% of the fund portfolio.
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