Should These Funds Close?
Morningstar.com readers fear these Vanguard, Fidelity, and other funds are getting too big to continue their winning ways.
Two weeks ago, we asked Morningstar.com readers to tell us which closed funds they'd like to reopen so they could get in. Though readers weren't shy about naming names, many noted that they'd rather have the closed funds they own stay closed. After all, the funds limited their access so managers could maintain their investment styles. Fling open the doors to new dollars, and the managers may need to change their styles to accommodate the inflows.
This week, we turned the question on its head, asking readers what open funds they think should close and why. To read the entire conversation or share your opinion, click here.
These four funds in particular received multiple mentions from our readers as candidates for closure:
Vanguard Dividend Growth (VDIGX)
Fund Analyst Rating: Gold
Category: Large Blend
Total assets: $26.1 billion
More Morningstar.com readers would like to see Vanguard Dividend Growth close than any other fund. "There's much favorable (and deserved!) publicity in a wide range of pubs and sites which likely is driving an increased torrent of assets in the direction of this single-manager open-end fund that has a somewhat-focused portfolio of stocks," says fpajerksi. Rathgar agrees: "One manager, 50 stocks, $25 billion. Keep the performance chasers out although it's probably too late. The performance chasers will be pulling out when this manager has his inevitable slump. This will hurt long term buy and hold investors."
Morningstar analyst Alec Lucas addressed the fund's asset size in his most recent analysis. Lucas notes that the fund's manager, Donald Kilbride, has shed some of his other responsibilities at subadvisor Wellington Management to focus more on running this fund. The fund's analyst, Peter Fisher, has also reduced his other responsibilities to focus more of his time here, and the group plans to add a dedicated junior team member. Says Lucas, "The fund's girth would be more of a concern were it not for a strategy that's built for scale." Kilbride focuses on liquid large-cap stocks with a history of increasing dividends. Concludes Lucas, "One of the category's biggest funds remains one of its best."
Fidelity Contrafund (FCNTX)
Fund Analyst Rating: Silver
Category: Large Growth
Total assets: $101.6 billion
"Firmly agree on the need to close FCNTX, it's way past due," says longameyes2. "Fidelity is typically slow to close funds, which puts long-term holders at risk over the pursuit of new money/fees. Be a shame for such a star fund to be damaged because of it."
Indeed, this has been a star fund, led by manager Will Danoff for more than 25 years. Danoff has proven adept at handling such a sizable asset base. Nevertheless, rising assets have led him to compromise over time. "Danoff has made tweaks to the process over the years to accommodate its growing size, including trading less often, owning fewer mid- and small-cap names, and maintaining a portfolio of 270-500 stocks," says Morningstar analyst Katie Reichart in her latest report. "These moves haven't affected long-term performance, which remains strong, but there's always the risk that the fund won't handle future asset growth as well (the fund has been closed in the past but is currently open and experienced outflows in 2015)."
Fidelity Low-Priced Stock (FLPSX)
Fund Analyst Rating: Silver
Category: Mid-Cap Value
Total Assets: $37.9 billion
"I expect a flattening of results to occur any second now," says dirkronk. "Of course, I've been expecting that for several years...[Manager Joel] Tillinghast is amazing." Peter5 adds: "FCNTX and FLPSX. Both 5-star Silver funds but would be 5-star Gold if their asset bases were smaller."
Like his colleague Danoff at Contrafund, Tillinghast is a 25-plus year veteran here. Unlike Danoff, Tillinghast has an extra restriction that makes maneuvering a large asset base even more challenging: He must invest in companies trading at $35 or less per share.
"The fund owned more than 900 stocks at last count, with a large tail of tiny positions," says Reichart in her latest report. Tillinghast also looks overseas for opportunity and has held more than a third of the fund's portfolio in international names. "Its huge asset base makes breadth a necessity, as he can't take big positions in the small- and mid-cap names he favors without exceeding ownership limits," writes Reichart. "In that regard, the fund's size is a constraint." She adds that the fund's large size is keeping its rating at Silver.
FPA Crescent (FPACX)
Fund Analyst Rating: Gold
Category: Moderate Allocation
Total Assets: $16.6 billion
This go-anywhere fund seeks equity-like returns with less risk. Chang suggests that FPA close the fund--among the largest in its category--and slash its expenses. (The fund earns a Negative rating for its Price Pillar because it's huge, yet remains one of the priciest options in the Moderate Allocation category.) Add retris: "I hold 6 figures in FPACX, but considering dumping it."
Analyst Dan Culloton had this to say in his latest report: "Few allocation funds beat this fund's track record, but it's not the same fund it was when it began its impressive, 22-year run. With nearly $23 billion under management here and in similar strategies, its management team's ability to invest in the small- and mid-cap stocks that helped it years ago is limited. There also are more people involved; manager Steve Romick now has two comanagers and seven analysts contributing." That said, Culloton points out that although the fund's style has broadened, it remains true to its core investing principles. "Asset size could make it harder for FPA Crescent to repeat its incredible record, but the firm's focus on achieving good absolute, rather than relative, long-term returns via high-conviction, bottom-up strategies hasn't wavered."
Susan Dziubinski has a position in the following securities mentioned above: FCNTX. Find out about Morningstar’s editorial policies.