Investment Strategy
We seek to pick winning funds with superior management and quantitative characteristics linked to strong performance. Our quantitative research uses the most comprehensive mutual fund database in the world to determine the best strategies for long-term investing success. We then supplement those studies with extensive qualitative research of portfolio managers, analysts, and traders through onsite visits and follow-up phone calls.
 
About the Editor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors. He also writes the Fund Spy column for Morningstar.com, the company's investment Web site.

Since joining the company in 1994, Kinnel has covered the Fidelity, Janus, T. Rowe Price, and Vanguard mutual fund families. He helped develop the new Morningstar Rating for funds and the new Morningstar Style Box methodology. He also is co-author of the company's first book, The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, which was published in January 2003.

 
 
Apr 28, 2017
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About Russel Russ' Photo
Russel Kinnel,
Director of Manager Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
5 Popular Funds That We're Not Sold On

Looking at the funds getting the most new money, I was struck that we agree with investors and rate many of them very highly.

But what fun is that? This made me want to find some areas of disagreement. So, I looked for funds with the most inflows that inspire a “meh” from us (also known as a Morningstar Analyst Rating of Neutral). Therefore, I will share five of the most popular funds that fail to impress us. Each fund has some strong points but also some flaws that keep us from endorsing it.

Lord Abbett Short Duration Income LALDX
The investing public really really likes this fund. It has taken in $4.6 billion in the 12 months ended March 2017. The appeal of this $40 billion fund is pretty obvious. It has a big 3.8% yield, and it beats the short-term bond Morningstar Category nearly every year. But yield also explains why we are only Neutral on the fund. To get a yield like that with short-term debt, you’ve got to take some credit risk, and this fund does. The fund has 10% in high-yield debt and another 6% in bank loans. In addition, it has a lot in the low end of investment grade, with 34% in BBB rated debt at year-end. In the period when credit took a hit from June 2015 to February 2016, the fund lost 1.2%, putting it in the bottom decile of its peer group. That may be more risk than a short-term-bond fund investor wants.

JPMorgan Core Plus Bond ONIAX
This intermediate-term bond fund has taken in $3.7 billion the past 12 months. This fund doesn’t have an outsize yield, but its solid long-term returns no doubt explain the fund’s appeal. The fund is managed by a team of people running respective sleeves, and this is where our concerns lie. Mark Jackson left in 2016, and two managers retired in 2013 and 2014, respectively. In addition, a senior member of the investment-grade credit team left in 2016. The changes may in part be fallout from JP Morgan’s decision to combine its Ohio- and New York-based bond teams. These kinds of moves often spur departures, and they give us pause.

American Funds Bond Fund of America ABNDX
This intermediate-term bond fund has taken in $2.6 billion, though its performance and yield are middling. It does boast decent fees, but I doubt that is sufficient to draw investors. It looks like the fund is instead benefiting from flows into American Funds’ target-date funds. Those funds tap American’s excellent equity funds as well as its less-impressive bond funds, so the investment public is actually making a good call here. It is just that the bond side is not all that great. American has worked hard to improve performance by revamping its management structure and tweaking strategies, and the changes seem reasonable. However, performance still hasn’t picked up, and we’re in wait-and-see mode.

Parnassus Endeavor PARWX
This large-growth fund has doubled in size, owing to $2 billion in inflows the past 12 months. Manager Jerry Dodson had a great 2016 that boosted the fund’s trailing returns near the top for the past three-, five-, and 10-year periods. However, Dodson is 73, and it is not realistic to expect him to keep managing the fund for another 10 years. Also, the influx of cash has caused Dodson difficulty in finding new areas to invest. As a result, the fund’s cash weighting is 15% and fees are middling.

Oppenheimer Senior Floating Rate OOSAX
This bank-loan fund received about $2 billion in inflows the past 12 months. But it is the outflows that worry us here. Bank loans are not the most liquid securities, and a couple of bursts of outflows prompted management to tap lines of credit in 2014 and 2015 to generate cash for redemptions while loans settled. Tapping a line of credit may well have been the right call, but it illustrates the rather small margin for error. Lower-quality debt like the kind favored in this fund can see liquidity dry up, yet management likes to run with a low cash stake. Put the two together and you have some liquidity challenges. They didn’t get out of hand the previous times, but the risk is real.


 



 


 

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