Fund Watch


The Kip 25 Funds That Worry Us

Nellie S. Huang

We’re not dumping these seven funds yet, but we continue to watch them closely.



The Kiplinger 25 doesn’t change much, but when it does, it’s for a good reason. When a fund closes to new investors, for instance, we replace it. Asset bloat (too much money) is another reason for a switch; so is persistent bad performance.

See More: The Kiplinger 25 at a Glance

Seven Kip 25 funds are currently on our watch list. That doesn’t mean we’re going to dump them, but it does mean we see potential problems that might lead to subpar performance. As a prelude to our annual Kiplinger 25 blowout, which will appear in the May issue of Kiplinger’s Personal Finance magazine, here’s a list of seven funds that concern us and why.

A huge asset base has tripped up many great funds. Once a fund gets too big, it becomes difficult for a manager to buy and sell securities without pushing their prices in the wrong direction—up while they buy, down as they sell. The poster child for the disease of asset bloat is Fidelity Magellan (FMAGX), which was once the biggest mutual fund in the land but has been a mediocre performer for most of the past 15 years. Could Kip 25 members Fidelity Contrafund (FCNTX) and Fidelity Low-Priced Stock (FLPSX) be on a similar path? The wonderfully talented Will Danoff and Joel Tillinghast have run Contra and Low-Priced, respectively, for decades. But success has made these funds obese. Contrafund has $111 billion in its coffers; Low-Priced Stock, with $48 billion, is the largest fund in the country with a focus on midsize companies.

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Baron Small Cap (BSCFX) is bulky, too, relatively speaking. The fund has $5.9 billion in assets, which manager Cliff Greenberg says is manageable but which seems awfully large for a fund with “Small Cap” in its name. Despite holding fewer assets, many of Baron’s better-performing peers have already closed to new investors.

When poor short-term performance starts to drag down long-term returns, we take notice. Two Kip 25 funds fall into this category: Artisan Value (ARTLX), which focuses on stocks of large domestic companies, and Harbor International (HIINX), which buys foreign stocks. Both funds now lag their respective benchmarks over the past three years through January 29.

Artisan Value has lagged its peers—funds that invest in large undervalued stocks—in each of the past two years. Harbor International is in better shape. It outperformed the typical foreign stock fund in 2011 and 2012, but its 2013 return—which trailed three-fourths of its peers—has dragged down the fund’s three-year results.

Harbor Bond (HABDX) had a tough 2011, and then it struggled in 2013. Its 1.5% loss last year trailed the typical taxable intermediate-term bond fund by a smidge, although it beat the Barclays Aggregate U.S. Bond index by 0.6 percentage point.

But Pimco, which runs Harbor Bond as a near-clone of its flagship Total Return fund (PTTDX), seems to be at an inflection point. Mohamed El-Erian, Pimco’s chief executive and co-chief investment officer, is leaving the firm in March. Kiplinger columnist Steve Goldberg has expressed concern that with El-Erian’s departure, no one with stature will be left to challenge the views of Pimco’s other chief investment officer, Bill Gross, who runs both Total Return and Harbor Bond.

On top of that, Gross’s wide scope of responsibilities concerns us. In total, he runs 31 funds and is responsible for a stunning $371 billion in assets under management. Something’s gotta give, and we’re worried that it will be performance.

Finally, there’s T. Rowe Price Small-Cap Value (PRSVX). With $10.2 billion in assets, Small-Cap Value is the nation’s third-largest small-company fund. But size hasn’t been a hindrance—at least not yet. From the time manager Preston Athey took over the fund in 1991 through January 29, it has returned an annualized 12.9%. That trounced the Russell 2000 small-company index by an average of 2.8 percentage points per year. Few small-company funds have done better. But Athey is retiring in June, and the departure of a successful manager always raises alarms. His replacement, David Wagner, looks promising—at Price he earned a solid record running a fund designed for European investors. Nonetheless, we’re watchful. Athey, the longest-tenured equity manager at Price, has a nearly peerless record.



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