How the Fund Raters Rate the Kip 25 No-Load Funds
Most of our mutual fund picks fare very well under the rating systems of Lipper, Morningstar and others.
Enough about how much we like the funds in the Kiplinger 25. What do professional raters think of them? We reviewed how four rating schemes graded each of our picks. The results: For the most part, the raters’ views jibe with ours.
Two systems are based on past results: Lipper’s Total Return ratings are based on returns over the past three, five and 10 years relative to similar funds. Lipper gives 19 of the Kip 25 funds the top five-star rating. Morningstar’s star ratings also look backward. Stars are based on three-, five- and 10-year returns, after adjusting for risk and loads, relative to peers. Twelve of our picks earn Morningstar’s top five-star score.
Two rating schemes seek to identify future winners. Analysts at S&P Global Market Intelligence dive into a fund’s portfolio. Funds with holdings that fetch high ratings from Standard & Poor’s analysts get more credit. S&P awards five stars to 14 of the Kip 25 funds. Morningstar’s analyst ratings assign grades of gold, silver, bronze, neutral or negative. In addition to looking at fees and performance, Morningstar analysts take into account such things as investment process and a fund’s personnel. Eighteen Kip 25 funds win either a gold or silver medal.
One outlier in Morningstar’s analyst ratings: DoubleLine Total Return Bond (symbol DLTNX). Analyst Sarah Bush deems the fund “not ratable,” largely because DoubleLine will not speak with her or her colleagues. Jeffrey Gundlach, DoubleLine’s founder and Total Return’s comanager, won’t talk with Morningstar analysts because, he says, their reviews “have not been objective.”
Only four Kip 25 funds get subpar scores from one rater or another. A managerial transition, plus a focus on out-of-favor stocks (including energy firms), hurt T. Rowe Price Small-Cap Value’s (PRSVX) results relative to its peers in 2013 and 2014. Fidelity New Millennium (FMILX), rated against other large-company growth funds, was hurt by holdings that weren’t big or weren’t growing rapidly—energy stocks being the main culprits. Dodge & Cox Stock (DODGX) has a fine long-term record. But because its managers often invest in out-of-favor stocks, it sometimes lags over shorter periods. We expect these funds to recover. Fidelity Intermediate Municipal Income (FLTMX), a conservative bond fund, has been a middling performer, but we like that it has been less volatile than its peers over time.