August 26, 2013

5 Funds Newly Rated by Morningstar

Portfolios that focus on small cap, real estate, value and strategic equity themes are put under the analysts' microscope

Morningstar banners (Photo: AP)Almost daily, asset managers roll out new mutual funds, ETFs and other products. (The latest funds are highlighted each Monday in ThinkAdvisor’s Portfolio Products Roundup.)

Chicago-based Morningstar provides data and in-depth research on some 433,000 investment offerings worldwide and says it does its best to keep advisors and investors up to speed on each and every product on the market.

“Although we spend most of our time updating the Morningstar Analyst Ratings of funds we've already rated, we continue to add funds to our ratings universe,” said Russel Kinnel in a report last Monday. “Some of these funds are relatively new, while others have been around for a long time.”

Morningstar analysts give funds a rating of gold, silver, bronze, neutral or negative.

“We don't have any rules regarding at what level a fund must start; we just rate them where we think they fit,” Kinnel explained.

Here are five of Morningstar’s most recent ratings.

DFA co-CEO David BoothDFA International Small Company (DFISX) is rated silver, “because it is right in DFA's wheelhouse,” according to Kinnel.

This fund from Dimensional Fund Advisors delivers “excellent small-cap passive exposure by tracking a savvy approach to trading less-liquid names,” the Morningstar analyst explains. “This enables the fund to perform better than most small-cap benchmarks both in the United States and abroad, even though they aren't taking a view on individual stocks.”

The fund charges 0.56%, which makes it one of the cheapest funds in the category, Kinnel adds.

Vanguard sign (Photo: AP)Vanguard FTSE All-World ex-U.S. Small Cap Fund (VFSVX) is rated silver, though it has just three years under its belt.

According to Kinnel, “Your choice for foreign small-cap passive funds really comes down to this one versus the aforementioned DFA fund.”

The Vanguard fund, though, charges 0.45%, or 11 basis points less than the DFA fund. The fund does not yet offer the cheaper Admiral share class; however, it can be bought as an ETF with a lower 0.25% fee.

While the Vanguard fund tracks a low-turnover index, Morningstar’s Kinnel says he slightly prefers its DFA counterpart “because it has beaten Vanguard's index over the long haul.”

Fidelity Real Estate Investment (FRESX) has a bronze Morningstar analyst rating.

“It's a nice, straightforward play on real estate investment trusts,” with 55 holdings in its portfolio, explains Kinnel.

While there are, of course, more concentrated funds out there, this fund “has beaten most of its peers and is even a hair ahead of Vanguard REIT Index's (VGSIX) retail shares since their 1996 inception,” the Morningstar analyst notes.

The fund has outperformed its category average each year by a range of 42 to 277 basis points since 2007, when it last underperformed.

RS Value (RSVAX) has a neutral rating because its managers are overhauling its strategy.

The fund’s portfolio managers want to be sure they can avoid unintended bets if, for example, everyone influencing the fund “picks economically sensitive stocks or raises cash,” Kinnel explains.

RS Investments also implemented risk controls “to further get a grip on things,” according to Morningstar, and “if these changes make the fund less erratic, that could be a good thing.”

Vanguard Stategic Equity (VSEQX) has a neutral rating from Morningstar “because our enthusiasm for Vanguard's quantitative group is rather tepid,” Kinnel says.

The fund’s models stress high profitability and low valuations, and like many quant funds, it “lagged in 2008 and 2009 when macro events dominated the kind of past individual stock data that this fund uses,” he adds. It’s long-term record is “closer to adequate than stellar,” he says.

Still, the fund had a good rebound over the past two and a half years.

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