Unit Investment Trusts – Marsico, Merrill Lynch, MFS, Oakmark, Oppenheimer, PIMCO, Putnam

May 15, 2009 by kutenk · 1 Comment
Filed under: Investment 

14) Marsico
Founder Tom Marsico runs some of the better large-growth funds around. Marsico put up great returns at Janus before setting out on his own, and he has continued to produce strong relative performance since then. Marsico blends stock selection with top-down analysis (playing on macroeconomic trends) to make a pleasing mix. More recently, the firm has launched funds run by former Marsico analysts.

Strengths: Tom Marsico is the proven quantity here, so we favor his Marsico Focus and Marsico Growth funds. If you invest with a broker, you can find similar funds under the Nations Marsico label. Marsico International Opportunities is a fine growth-leaning foreign fund, but we’d like to see its expenses come down.

Weaknesses: Due to his superb long-term track record, Marsico’s funds have attracted a huge amount of assets over the past several years. Although he focuses on highly liquid large caps, there’s a risk that ongoing inflows will limit Marsico’s ability to pack a lot of assets into his highest-conviction picks.

15) Merrill Lynch
Merrill Lynch’s mutual fund operation has made some positive strides since Bob Doll took over as president and chief investment officer in 1999, but can’t yet be counted among the mutual fund elite. Doll has helped modernize the firm’s research, risk control and trading platforms, and has also improved the communication between managers and analysts. Another big improvement here is a compensation scheme that places greater emphasis on longer-term performance. Doll has made some key changes on the personnel front as well.
Still, Merrill’s lineup is a work in progress. There are a number of funds with mediocre results, as well as some with narrow mandates that make them exceptionally volatile. Also, expenses are high on many of the firm’s funds given their asset levels.

Strengths: Merrill Lynch Large Cap Core and Merrill Lynch Large Cap Value are particularly sound.




Weaknesses: The firm has a few holes in its domestic small- and mid-cap lineup. The international funds also need some work; Merrill Lynch Developing Capital Markets, an emerging-markets fund, is particularly weak.

16) MFS
MFS, which runs the industry’s oldest mutual fund, has a full lineup of funds, but the shop is perhaps best-known for its large-growth offerings. As was the case at firms like Putnam and Janus, MFS’ gutsier funds put up impressive returns in the late 1990s, but they crashed back to earth in 2000 with the onset of the bear market. Since then, MFS’ growth-oriented managers are paying closer attention to valuation when selecting stocks for their portfolios. The firm also has beefed up its research effort by hiring some more-experienced analysts and firing some underperforming managers. Recent performance has been stronger, but it’s too soon to say whether those results are sustainable.




MFS is also recovering from 2004’s market-timing scandal, in which regulators found that the firm allowed fast-trading in some of its funds. (It’s worth noting that MFS did not have any “sticky asset” deals, whereby large investors agree to invest certain sums in a fund company’s offerings in exchange for the ability to quickly move in and out of its funds.) MFS has since brought in new senior management, strengthened the independence of its board of directors, and stopped using soft dollars to pay for third-party stock research.

Strengths: Although MFS is known for its growth investing, its value funds—specifically MFS Value and MFS Strategic Value—are among the firm’s strongest offerings. It’s worth noting, however, that two of the value team’s longest-tenured members have retired in the past year.

Weaknesses: MFS is looking to some relatively inexperienced managers to turn around some funds with lackluster relative returns, including the flagship MFS Massachusetts Investors Trust and MFS New Discovery, a small-growth fund. We’d wait for these managers to prove their mettle before jumping in.

17) Oakmark
Oakmark uses a deep-value approach on all of its funds, seeking companies that are trading at big discounts to its managers’ estimates of their intrinsic values. Oakmark is a highly research-intensive firm, and the managers know their companies inside and out. Generally speaking, this approach has produced strong long-term returns. However, the concentrated nature of the portfolios, combined with some managers’ willingness to take on sector risk, has sometimes led to uneven performance.

Strengths: We’re fans of Oakmark’s domestic- and foreign-stock funds. The crown jewels here are Oakmark Fund and Oakmark Select, which are run by 2001 Morningstar Domestic Stock Manager of the Year Bill Nygren.

Weaknesses: We wouldn’t recommend building a portfolio exclusively of Oakmark funds, because that would leave you without growth stocks or fixed income.

18) Oppenheimer
Oppenheimer isn’t a bad choice for one-stop shopping. The firm, whose funds are sold through advisors, offers a diverse lineup covering various asset classes and investment styles. Managers and analysts work in teams based on their investment disciplines, such as growth, value, and global.
Oppenheimer’s domestic-equity funds rarely shoot out the lights, but many of them offer a respectable risk/return profile. The fund’s value lineup had been a weak area in the past, but the firm has taken steps to address the problem. It has brought in outside managers and analysts to build up the value team. The firm also brought in a new investment-grade bond team to take over a few middling fixed-income offerings. That team, which came from the former MAS division of Morgan Stanley, follows a disciplined process that places great emphasis on risk control. Finally, the firm’s Rochester municipal-bond division has recently assumed responsibility for the firm’s national and state tax-exempt funds.

Strengths: Under the guidance of Bill Wilby, Oppenheimer’s global lineup is the firm’s crown jewel. A unique theme-based approach to uncovering hidden gems across the globe has generally delivered superb results. Oppenheimer Capital Appreciation, a tame large-growth offering, is also worth a look.

Weaknesses: Many of the fund’s municipal-bond funds have been lackluster performers, so we’d steer clear.

19) PIMCO
PIMCO’s prowess in fixed-income management is second to none. PIMCO Total Return is by far the biggest bond fund around and it’s also one of the best. PIMCO’s size has enabled it to build a great staff of analysts, managers, and traders. In addition, its size has given its institutional share classes low expenses. We’ve twice named PIMCO’s bond guru, Bill Gross, our Fixed Income Manager of the Year because of his uncanny ability to regularly turn in great results.

Strengths: If you invest through a 401(k) or a planner with a large practice, you might be able to buy into the low-cost institutional share class of PIMCO Total Return. If not, PIMCO subadvises Harbor Bond, a low-cost virtual clone of that offering. PIMCO also offers a suite of fine offerings designed to perform well in an inflationary environment, including PIMCO Real Return and PIMCO Commodity Real Return Strategy.

Weaknesses: PIMCO’s shorter-term bond funds are fine if you can get into one of the institutional share classes, but the lettered share classes (A, B, C, and D shares) are too costly.

20) Putnam
Like Janus, Putnam has been struggling in recent years to recover from terrible bear-market losses at its growth funds as well as its involvement in the fund scandal. Regulators accused the firm of fraud in 2003, alleging that the fund company allowed some investors—including six of its own fund managers—to quickly trade in and out of its funds at the expense of long-term fund holders. When Putnam executives discovered the improper trading, they failed to properly discipline the employees. Putnam also failed to cut off market-timers in its 401(k) funds.
Putnam has taken considerable steps to put this episode behind it, including dismissing its former chief executive Larry Lasser. Ed Haldeman, the new CEO, engineered considerable improvement at Delaware Investments before joining Putnam about two years ago. Haldeman has improved compliance, cut fees, fired personnel involved in the unethical trading, and is working to improve performance at the firms’ funds.
We’re not giving Putnam a clean bill of health—it still has to prove that its lackluster growth offerings are on the mend—but the firm deserves credit for its efforts to reform its culture and deliver better results for investors.

Strengths: Putnam’s value and blend funds are generally solid; New Value has been a particularly strong performer under manager Dave King’s watch.

Weaknesses: Putnam appears to have its growth funds aimed in the right direction, but we wouldn’t jump in just yet, particularly because the funds have seen significant management upheaval in recent years. The firms international funds, once a real bright spot in its lineup, are no longer the strong options they once were, owing to a key manager’s dismissal during the fund scandal.

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Mutual Fund Investment – Fidelity, Franklin Templeton, Mutual Series, Harbor, Janus, Longleaf Partners

May 12, 2009 by kutenk · Leave a Comment
Filed under: Investment 

9) Fidelity
This privately held colossus offers the advantages and disadvantages that come with its girth. The positive aspect of its heft is that Fidelity has hundreds of very bright managers and analysts conducting excellent fundamental analysis. In addition, Fidelity passes the economies of scale on to investors in the form of low expense ratios.

The downside is that managing hundreds of billions of dollars limits the flexibility of Fidelity’s fund managers. Just as asset bloat can hinder an individual fund, it can hinder a fund family, too. The firm left open some of its biggest funds, including Magellan and Low-Priced Stock, longer than it should have, meaning that the managers are apt to have a tough time delivering standout performance going forward. The fund is tempting fate with the giant Contrafund; although Will Danoff continues to do a spectacular job, the fund’s girth will present an increasing challenge for him.

The firm’s huge number of portfolio managers also means that analysts spend a lot of time repeating themselves to all the managers interested in their stocks. (To make sure analysts’ research has an impact, Fidelity compensates analysts based on how much their picks contribute to fund performance and how well analysts communicate with managers.) One other problem: Fidelity has to constantly fend off poachers trying to hire away its smart young analysts and managers. In 2002, AXP Funds pulled off a coup when it lured a few of Fidelity’s rising stars and two analysts to head a new unit running large-cap AXP funds; Fidelity has also lost a number of top managers to hedge funds over the years.

Size has made Fidelity’s funds more mild-mannered than in the past. You won’t get any unpleasant surprises from Fidelity funds, but you’re not likely to see many funds crush their indexes, either. Expect Fidelity funds to quietly outperform over the long haul.
Fidelity funds are primarily sold through no-load channels, but the firm also has an extensive lineup of offerings geared toward financial advisors.




Strengths: Fidelity’s U.S. stock funds aren’t exciting, but the group’s large-cap funds are generally well-run, dependable vehicles. The firm has also had success with its smaller-cap offerings, particularly the giant Low-Priced Stock, but asset bloat is an ongoing worry and the firm’s small-cap staff is quite lean given the funds’ size. The firms government and high-quality corporate bond funds are wonderfully conservative portfolios. The firm’s fixed-income managers avoid making market bets and simply stick to researching companies and selecting bonds that appear undervalued. The firm’s municipal-bond operation is also one of the fund world’s best. In an effort to compete with indexing giant Vanguard, Fidelity reduced the expense ratios on a number of its index funds to 0.10% in 2004; Fidelity made those few cuts permanent in early 2005.

Weaknesses: Fidelity runs a host of narrowly focused select funds, many of which investors should avoid. Funds like Fidelity Select Air Transportation and Fidelity Select Defense & Aerospace are really only of use to speculators who want to make a bet on an industry. Unlike some firms’ sector offerings, Fidelity’s sector funds are not designed as places for managers to stay for the duration of their careers. Rather, a sector manager is supposed to learn about the sector and then move on after a year or two to learn about another sector or run a diversified fund. Moreover, while Fidelity has historically done a solid job of running small-cap money, the firm has a tendency to let its small-cap and mid-cap funds grow too large. For a truly nimble small-cap offering, we’d look elsewhere.




10) Franklin Templeton/Mutual Series
The Franklin Templeton umbrella covers five distinct groups under three names. Templeton is a value-oriented foreign-stock shop with a lineup of well-managed but often pricey funds. Under the Franklin name, you’ll find some good municipal bond managers, a decent growth-stock group, and a separate small-value crew that runs Balance Sheet Investment and MicroCap Value.

Finally, the Mutual Series group runs outstanding low-risk deep-value funds out of New Jersey. The firm does rigorous balance-sheet analysis and seeks to buy stocks on the cheap. Over the years, the Mutual Series funds have produced excellent returns at very moderate risk levels. The big negative at these funds is that founder Michael Price left the firm after selling it to Franklin, and his successor, David Winters, departed in mid-2005.
Franklin’s funds are sold primarily through financial advisors. The firm, which is publicly traded, ran into problems with securities regulators in 2004. In that year, state and federal regulators accused Franklin of allowing large clients to engage in improper trading of the firm’s funds; Franklin has since settled the charges. The firm has also faced scrutiny for its so-called revenue-sharing practices, whereby a fund shop pays to be part of a brokerage firm’s preferred-fund list.

Strengths: Thanks to combining the strengths of fund groups with different specialties, Franklin Templeton does a reasonable job of covering all the bases. Franklin runs some solid, income-oriented municipal-bond funds such as California Tax-Free Income and Federal Tax-Free Income. In addition, the huge Templeton Foreign, run by Jeff Everett, is a solid choice if you’re in the market for a conservatively managed foreign value fund.

Weaknesses: Although we’re big fans of the investment process at the firm’s Mutual Series funds, we can’t help but notice that the shop has seen a parade of manager defections over the past several years, and David Winters’ recent departure is a huge blow. Meanwhile, the firm has let other funds, such as Franklin Small-Mid Growth, grow too large.

11) Harbor
Harbor, a division of Dutch asset manager Robeco, doesn’t offer index funds, but it does offer moderate-cost actively managed funds run by outstanding subadvisors.

Strengths: Harbor Bond is run by fixed-income superstar Bill Gross, making it the cheapest way for no-load investors to gain access to the brain trust at PIMCO funds. Harbor International Growth is a topnotch growth-oriented foreign fund run by Jim Gendelman at Marsico, and Harbor Capital Appreciation is run by Sig Segalas’ outstanding team at Jennison Associates.

Weaknesses: Although the institutional share classes of Harbor funds remain a great deal, expenses on the retail share classes of Harbor Capital Appreciation and International could be lower given their sizable asset bases.

12) Janus
The fund industry’s golden child in the second half of the 1990s, Janus is still working to regain investors’ trust following the one-two punch of terrible bear-market performance and the firm’s entanglement in the fund scandal in 2003. In April 2004, Janus settled with industry regulators to resolve allegations that it had allowed several clients market-timing privileges in a number of its funds. The firm has since instituted some notable reforms, including a new manager-compensation system that puts a greater emphasis on long-term performance. Janus has also made an effort to diversify its lineup somewhat. Although its funds had a near-exclusive focus on growth stocks in the second half of the 1990s, several of the inhouse Janus funds—including Janus Worldwide, Core Equity, and Enterprise—are more valuation-conscious and diversified by sector than they once were. Janus also owns part of value specialist Perkins, Wolf, McDonnell, which runs Janus Small Cap Value and Janus Mid Cap Value.

Those strides have led to improved performance on several Janus funds. But while Janus has historically done a decent job of retaining key investment personnel, the firm has a new CEO and chief investment officer, and a few of its longest-tenured portfolio managers have left the firm in recent years. Janus got too big too fast and crashed in the 1990s, and it’s still not clear the firm has adjusted to life as a large investment company.

Strengths: Despite its bear-market travails, Janus boasts a tightly knit group of managers and analysts and a research-driven culture. We’re also impressed that none of the firms many large-cap funds is inclined to hug the S&P 500. David Corkins, in charge of Janus Mercury since early 2003, has proved to be one of the firm’s top managers, having steered Janus Growth & Income to marvelous gains before assuming his current post. Janus Twenty has also posted strong, although erratic, returns on manager Scott Schoelzel’s watch.

Weaknesses: The firm’s foreign funds are still works in progress.

13) Longleaf Partners
Founded by Mason Hawkins and Staley Cates, this Memphis firm is a stickler for value. A stock has to be trading at least 40% below management’s estimate of intrinsic value before the firm will buy. If management does like a stock, it won’t be shy about buying. Longleaf typically runs focused portfolios of just 20 or 30 names. This practice can make performance erratic, but over the long haul the firm has put up strong returns.

Strengths: Although all three Longleaf funds are closed to new investors, we’d gladly buy into any of them should they reopen. Longleaf is also an exceptionally shareholder-friendly firm. It has never launched a trendy fund to capitalize on market demand, and all of its employees must keep all of their equity investments in Longleaf Partners funds.

Weaknesses: Longleaf Partners International, while a superb performer within the foreign large-value category, has a steep expense ratio that dims its appeal.

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