Morningstar Magazine - June/July 2018 - 31

Having a diverse portfolio of 300 names is common
for quant funds, as the idea is to emphasize
measures that have worked over time without
being overly dependent on a handful of
stocks. This fund's fundamental and transparent
drivers boost its appeal over many quant funds
that are black boxes and can be frustrating
to those trying to figure out the right way to use
them. In addition, the fund's 0.79% expense
ratio means it doesn't have far to go to catch up
with small-cap index funds.
For Schwab Total Stock Market Index SWTSX,
the road to Gold wasn't all that complicated. When
Schwab cut the fund's expense ratio to
0.21% in 2009, the move was not really compelling
in the passive world. When it cut the expense
ratio to a very cheap 0.09% in 2010, however,
we rated the fund Silver. Then Schwab cut it to just
3 basis points in February 2017, and naturally
we raised the fund to Gold. That's tough to beat.
The JPMorgan SmartRetirement funds had a few
drivers that brought us to Gold in February
2018. One was a fee cut. Target-date funds often
have a fund-of-funds structure, so you need to pay
attention to the summed-up prospectus
expense ratio to compare funds. In this case, cuts
in the fees of underlying funds gave the targetdate funds fees between 0.41% and 0.51%
for R6 shares. Equity-heavy later-dated funds like
JPMorgan SmartRetirement 2040 SMTYX are at
the higher end of this range, and bond-heavy
funds are at the lower end. In any case, those are
attractive fee levels.
The second piece of the story was continued
strong execution from a stable team led by Anne
Lester. It's a very experienced team that also
includes key managers Dan Oldroyd, Mike
Schoenhaut, Eric Bernbaum, and Jeff Geller, and it
has led the funds to top-quartile performance over
the trailing five- and 10-year periods. (Performance
varies by target-date year and share class.)
The third piece was that we upgraded the two
biggest underlying funds in the target-date
series. We raised JPMorgan Core Bond JCBUX
to Silver and JPMorgan U.S. Research Enhanced
Equity JDEUX to Bronze. Those funds, like
many in JPMorgan's lineup, offer dependability

over thrills. They are very consistent, disciplined
strategies run by experienced investors. And
quietly consistent is a virtue in a target-date fund.
Russel Kinnel is director of ratings, manager research, with
Morningstar Research Services.

Managers Who Buy
Their Own
Lagging Funds
It can be profitable to invest like a contrarian, but
it is very difficult to follow that path. Morningstar
research has shown that fund investors
must be willing to endure often prolonged bouts
of underperformance to realize long-term
outperformance. It's easier said than done, but one
way to embolden oneself to hang on to or even
add to a fund that has been stuck in a fallow
period is to look at what the strategy's managers
are doing with their money.
Buying can be a good sign and selling a warning
flag. Take Fidelity China Region FHKCX, which has
a Morningstar Analyst Rating of Neutral.
Manager Bobby Bao's ownership in the fund
dropped from the $100,000-$500,000 range at the
end of 2016 to nothing at the end of 2017-
just before he announced plans to step off.
When a key manager increases personal
investments in a fund with a lagging recent record,
that can be a reassuring sign. A variety of
factors can explain the increased stakes, including
the awards of deferred compensation plans
finally vesting or simple market appreciation.
So, it's not clear that every case illustrates
a manager writing an actual check to the fund.
Still, increasing manager investment in a
fund is a good sign that shows confidence and
conviction in the process and further aligns him
or her with shareholders.
The managers at BBH Global Core Select BBGNX,
a five-year-old offshoot of Silver-rated
BBH Core Select BBTEX, have upped their stakes
in the world large-stock fund in recent years.
They've done so even though the fund and its older

and primarily U.S.-stock-focused sibling have
trailed 85% or more of their respective peers in
the five years ended March. Nevertheless, the
managers continue to show faith in their process,
which gets a Positive rating at BBH Core
Select, where long-term results remain strong.
(BBH Global Core Select is unrated but has been
a member of the Morningstar Prospects list
of promising strategies since 2015's third quarter.)
Lead manager Tim Hartch, who has more
than $1 million invested in BBH Core Select, had
nothing in the global version of the strategy
in March 2015, but by February 2016, he had raised
his stake to more than $1 million. The investment
of his BBH Global Core Select comanager
Regina Lombardi also increased from between
$100,000 and $500,000 in 2015 and 2016 to
between $500,000 and $1 million as of the most
recent disclosure in 2017.
Comanager Deborah Turner's stake in Franklin
Mutual Shares TESIX has increased as the
deep-value fund has trailed 90% of its rivals in the
allocation-85%+ equity category in the five
years ended March. Morningstar has enough faith
in the fund's tried-and-true, analyst-driven,
bottom-up stock-picking approach to maintain its
Bronze rating. Its managers are keeping the
faith, too. Turner, who has been a listed manager
here since 2001 and at Franklin's Mutual Series
unit or its predecessors since 1993, had between
$500,000 and $1 million invested in the fund
in 2015 and 2016, but she had more than $1 million
in it as of the most recent disclosure in 2017.
Turner's comanagers since 2005, Peter Langerman
and David Segal, also have more than $1 million
invested here.
Bronze-rated RiverPark/Wedgewood RWGIX
manager David Rolfe allowed his ownership in the
concentrated large-growth fund that he
subadvises for the RiverPark family to dip below
$1 million from 2013 to 2016 as his St. Louis-based
boutique restructured ownership among
current and former employees. (Rolfe and fellow
major owner Tony Guerrerio bought out a
departing longtime partner and allowed other
members to buy in.) Rolfe, who also invests heavily
in the Wedgewood Partners Concentrated
Large-Cap Growth separate account, boosted his
helping of the RiverPark fund back above $1 million

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Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018
