Don't Chase These Hot Performers
These funds did well in 2013 but aren't poised to continue their streaks.
A version of this article appeared in the February 2014 issue of Morningstar FundInvestor.
The Morningstar 500 includes 54 funds with Morningstar 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. Both of the funds highlighted below-- CGM Focus (CGMFX) and Thornburg Value (TVAFX)--were among the M500's Neutral-rated overachievers. Current investors should obviously be pleased with these funds' results last year, but as detailed below, prospective investors giving them a fresh look because of recent success continue to have superior options among the M500's Medalists.
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 September 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 repeatability of a process that's less a strategy than a series of opportunistic lurches and extreme portfolio makeovers. Outsized volatility and erratic performance patterns have made the fund difficult to use well. In 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 99th percentile. CGM Focus remains a fund best admired from afar.
Connor Browne and Edward Maran have been comanagers 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, disastrous. 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.
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.