Key FeaturesAsset-Weighted Expense Ratio 0.76%Active/Passive Exposure 86% ActiveOpen/Closed Architecture 100% ClosedTotal Net Assets ($M) 147,242
Executive Summary Rating:
Process ∞ PositiveManagement's research suggests investors spend more moneyin retirement than they anticipate and risk outliving their sav-ings. As a result, the funds' glide path has a higher equity alloca-tion than many of its rivals', both before and during retirement.The majority of the underlying funds are highly regarded by Mor-ningstar analysts.
Price ∞ PositiveThis series' funds aren't as cheap as its peers that invest in pas-sively managed options, but they are reasonably priced, especial-ly compared with other series that invest predominantly in ac-tive strategies.
Performance ∞ PositiveThe series' three-, five-, and 10-year returns through March2016 handily outpace the majority of its peers. But the funds'relatively heavy equity stake can lead to greater short-term vola-tility than many rivals. For example, the funds lost more thantheir average competitor during 2008's market slide and reboun-ded more sharply than most during 2009's rally.
People ∞ PositiveT. Rowe Price's asset-allocation committee makes the strategicdecisions for the funds, while firm veteran Jerome Clark leads agroup of associate managers who run the funds' day-to-day op-erations. Longtime team member Wyatt Lee joined the managerroster in August 2015. The underlying funds largely feature sol-id, proven managers.
Parent ∞ PositiveT. Rowe Price's corporate culture and regulatory history are im-pressive. The firm stresses long-term investing, high-quality se-curities, and sensible risk management. T. Rowe also does agood job describing its target-date funds and communicatingwith investors. Manager transitions are typically planned well inadvance.
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that are morelikely to outperform over the long term on a risk-adjusted basis.
Analyst Rating SpectrumŒ „ ´ ‰ Á
Strategic Glide Path Total Equity Exposure100
80
60
40
20
0
%
0
20
40
60
80
100 T. Rowe PriceRetirementIndustry AverageIndustry Maximum/Industry Minimum
Morningstar Opinion Leo AchesonAnalyst - Fund of Fund Strategies 05-04-2016
Solid underlying funds and a steady asset-allocationapproach give the T. Rowe Price Retirement series adiscernible edge over most peers. The team's tenden-cy to stick with the status quo when underlying man-ager concerns arise gives us pause, and continued as-set growth might lead to a small shift away from ac-tive management, a meaningful driver of the series'outstanding long-term results. Therefore, the series'Morningstar Analyst Rating has fallen to Silver--stilla strong vote of confidence--from Gold.
This series' advantages begin with its consistency.Jerome Clark has served as series' lead managersince its 2002 inception. A growing 23-member asset-allocation group supports Clark. With the risk of out-living one's assets in mind, the group designed aglide path that looks more aggressive than the typicalcompetitor. Except for the early savings years, the ser-ies keeps a higher equity weighting than the industrynorm throughout the glide path.
Within the portfolios, the series' lineup of skippers re-mains impressive. Morningstar analysts rate 16 ofthe series' 18 underlying T. Rowe Price funds; 11 areMorningstar Medalists as of this writing, reflectinganalysts' conviction that they will outperform peersover the long haul. Five receive Neutral ratings, includ-ing three funds that were downgraded during thepast three years because of manager changes, butthe overall lineup still stands strong.
Even so, a more proactive role in advocating for theongoing quality of underlying funds would be ideal.Morningstar considers it a best practice for target-date managers to continually assess the stand-alonemerit of each underlying fund used within their ser-ies. In contrast, this series' management team leavesthat oversight to each underlying fund's respectivesteering committee.
Nonetheless, the series has turned in excellent re-sults, thanks largely to its supporting managers. Allvintages have outperformed their typical rivals on anabsolute and risk-adjusted basis in the trailing one-,three-, five-, and 10-year periods through March2016. An equity-heavy approach has also boosted re-sults.
Strong returns have attracted investors: The serieshas accumulated more than $130 billion in assets.That raises concerns about capacity, as four of the ser-ies' five small- and mid-cap funds are closed to newinvestors. To address the capacity issue, the seriesmay begin investing in small- and mid-cap indexfunds in 2016. The series' access to top-tier activefunds, including the small- and mid-cap strategies,has been one of its key strengths and has helped de-liver excellent long-term results. The inclusion of in-dex funds hints at a philosophical shift, even if theyend up taking a small percentage of overall assets.
Page 1 of 5 | Morningstar Target-Date Fund Series Report | 09-30-2016 | For Financial Professional Use Only.
T. Rowe Price Retirement Target-Date Fund Series Report
In conducting extensive in-house studies, T. RowePrice found that 401(k) plan participants' average sav-ings rate is less than half of the recommended rate,while the average withdrawal rate was more thantwice the recommended rate. T. Rowe Price conclu-ded that retirees' biggest risk is outliving their sav-ings. As a result, it emphasizes sizable exposure tostocks to boost asset growth.
The series has a relatively aggressive asset-alloca-tion glide path. It begins with a 90% equity/10% fixed-income portfolio when investors are the furthest fromretirement. That split roughly matches the typicalpeer 40 years from retirement, but the series' fundsmaintain a higher equity stake than most rivals bothleading up to and during retirement. The funds slowlytransition from stocks to bonds at the end of each quar-ter until they reach the target allocation of 55% equi-ty at retirement. The shifting doesn't stop at retire-ment, because T. Rowe doesn't view the retirementyear as a distinct year in the course of an individual'sretirement planning. Even after investors arrive at the55% equity/45% fixed-income allocation at the tar-get retirement date, the quarterly shifts continue for30 more years until the equity stake plateaus at 20%.
Management has modest leeway to adjust the funds'stock/bond split (up to 5 percentage points) and makesub-asset-class tilts, such as growth versus valuestocks or developed-markets versus emerging-mar-kets stocks. A committee of veteran T. Rowe manag-ers uses qualitative inputs to determine which assetclasses appear to have the most favorable return pros-pects for the next six to 18 months.
The asset-allocation approach has remained consis-tent and is supported by sound reasoning, earningthe series a Positive Process rating. However, theteam could enhance its method for selecting and over-seeing underlying managers. The group picked under-lying funds based on their mandates and won't swapout strategies unless their approaches or styleschange. In fact, the series has not fired a managersince its 2002 inception. Instead, it relies on varioussteering committees at T. Rowe to provide oversight.Moreover, although the series' management team en-sures that the underlying funds provide style-pure ex-posure, it has not run additional analytics, such as cor-relation of excess returns, to assess how the fundscomplement one another.
Rating: Positive
Strategic Glide Path Total Equity Exposure100
80
60
40
20
0
%
0
20
40
60
80
100 T. Rowe PriceRetirementIndustry AverageIndustry Maximum/Industry Minimum
This series' and its underlying funds benefit from T.Rowe's strong investment culture. Long manager ten-ures and an emphasis on high-quality securities arecommon. The funds used in the series generally havesolid long-term records: Of the 15 underlying fundswith 10 years of history through March 2016 (exclud-ing the money market fund), all but one outperformedtheir Morningstar Category average.
Morningstar analysts cover 16 of the 18 underlyingfunds, of which 11 received medals as of this report'spublishing date. Five underlying funds, which accountfor more than 25% of the series' assets, receive Neu-tral ratings because of relatively recent managerchanges or uninspiring results. The firm’s portfoliomanager changes are usually well-planned and allowfor slow transitions to minimize disruption, though T.Rowe Price Growth Stock's manager unexpectedly de-parted in early 2014. In early 2016, the manager of T.Rowe Price Small-Cap Stock announced he'll stepdown in October; as a result, the fund's MorningstarAnalyst Rating slipped to Neutral.
The underlying funds cover a wide range of assetclasses. On the equity side, the series keeps a 70%U.S./30% international split (that includes a dedica-ted emerging-markets stock fund) that’s similar to thetarget-date industry norm. The series equity stake al-so includes T. Rowe Price Real Assets, which investsin the stocks of commodity producers and REITs. T.Rowe's research suggests that this fund will helphedge inflation in the long run. The series targets a5% allocation to the strategy throughout the glide path.
A core bond fund anchors the fixed-income exposure.More specialized funds, such as an emerging-mar-kets debt strategy and a high-yield bond fund, fill outthe remainder of the bond stake. The series uses T.Rowe Price Inflation Focused Bond as a bufferagainst inflation in the years leading up to retire-ment, but the fund has the flexibility to hold as muchas 80% in non-TIPS investment-grade bonds, depend-ing on the market environment.
Series Holding-based Style Map - EquityData as of 09-30-2016
Deep-Value
Core-Value
Core Core-Growth
High-Growth
GiantLarge
Mid
Small
Micro
Zone represents 75% of series' largest domestic stock holdingsFund centroid represents weighted average of series'domestic stock holdings
Top Investments as of 09-30-20163-Yr 5-Yr
% of 3-Yr % Rank 3-Yr 5-Yr % Rank Analyst StarCategory Assets Return % in Cat Std Dev Return % in Cat Rating Rating
T. Rowe Price New Income Intermediate-Term Bond 16.18 4.01 35 2.53 3.33 55 ´ QQQ
T. Rowe Price Equity Index 500 Large Blend 14.23 10.87 10 10.81 16.07 20 ´ QQQQ
T. Rowe Price Growth Stock Large Growth 12.42 11.03 21 13.23 17.36 9 ˇ QQQQ
T. Rowe Price Value Large Value 11.10 9.41 15 11.05 16.92 4 ´ QQQQ
T. Rowe Price Overseas Stock Foreign Large Blend 6.67 0.97 40 11.43 8.08 25 ´ QQQQ
T. Rowe Price International Gr & Inc Foreign Large Value 6.38 0.49 29 11.51 7.36 23 ˇ QQQQ
T. Rowe Price International Stock Foreign Large Growth 6.06 3.11 23 12.20 8.66 44 ˇ QQQ
T. Rowe Price Ltd Dur Infl Focus Bd Inflation-Protected Bond 3.87 0.28 89 1.89 0.45 89 - QQ
T. Rowe Price Mid-Cap Value Mid-Cap Value 2.64 10.59 9 10.90 16.27 27 ΠQQQQ
Total # Holdings 18% Portfolio in Top 10 Holdings 83.11Overall Average Morningstar Rating 3.71
Price Rating: Positive
The no-load share classes of T. Rowe's retirementfunds, which hold about 80% of the series' assets, car-ry relatively inexpensive price tags for primarily active-ly managed target-date funds sold to retail investors.T. Rowe does not charge an additional fee for its stra-
tegic and tactical asset-allocation services, so share-holders pay only the cost of the underlying funds. TheRetirement and Advisor share classes look pricey, asthey include additional distribution fees.
Asset-Weighted Cost vs. Industry AverageT. Rowe Price Retirement 0.76%Industry Average 0.76%
Avg Cost Per Share Class Exp Ratio (%) Net Assets ($M)No Load 0.70% 115,171Adv 0.95% 16,281Retirement 1.20% 10,353Inst 0.59% 5,436
– –
Page 3 of 5 | Morningstar Target-Date Fund Series Report | 09-30-2016 | For Financial Professional Use Only.
T. Rowe Price Retirement Target-Date Fund Series Report
The series' above-average equity allocation shapesits performance. In the immediate years leading up toretirement, it keeps roughly 10 percentage pointsmore in equities than the industry norm and remainsabove-average throughout retirement. Thus, thestrength of the equity market can make a big differ-ence in the series' performance pattern. For instance,during 2008's financial crisis, nearly all of the series'funds trailed their peer group averages.
The bold equity allocation has paid off as the markethas risen in the past few years: The series' funds aver-aged a top-quartile ranking in their peer groups in
five of the past seven calendar years. Even during2011's tumultuous market, the majority of the fundsin the series still surpassed their typical peer. Thatconsistent record burnishes the series' long-term re-sults: Among the funds with 10-year records throughMarch 2016, every fund ranks at or near the top of itsrespective peer group.
The series' above-average equity allocation has resul-ted in above-average volatility, as measured by stand-ard deviation. But the funds' gains have more thancompensated for the bumpy ride. Most of the funds'risk-adjusted returns in the trailing five- and 10-year
periods rank in the top quartile of their categories,helping the series earn a Positive Performance rating.
A solid cast of underlying funds further aids the ser-ies' overall performance. The underlying funds showa similar level of consistency in their calendar-yearrankings as the series' funds, with the majority outper-forming their typical peer each year. Thirteen of the18 underlying funds in the series with MorningstarRatings earn 4 or 5 stars, reflecting their strong long-term, risk-adjusted results.
Target-Date Fund Performance as of 09-30-2016YTD YTD % 2015 2014 3-Yr 3-Yr % 3-Yr 5-Yr 5-Yr % Star
Return % Rank in Cat Return % Return % Return % Rank in Cat Std Dev Return % Rank in Cat RatingT. Rowe Price Retirement 2005 7.6 5 -0.7 4.7 5.1 19 5.2 7.6 30 QQQQ
Risk-adjusted return exceeding category averageRisk-adjusted return trailing category averageCategory AverageData is based on longest available performance history: three or five years. For series with more than 18 months of history, but less than three years of
history, the risk-adjusted return of the appropriate Morningstar Lifetime Moderate Index is used to create a 3-year history.
Attribution AnalysisTrailing 3-Year Returns as of 09-30-2016
Glide Path
0.91
-1.03
0.23
Cost
0.64
-0.46
-0.01
Selection
0.13
-3.79
-0.57
Total
0.17
-3.82
-0.35
T. Rowe Price RetirementGlide Path 0.23Cost -0.01Selection -0.57
Total -0.35
Page 4 of 5 | Morningstar Target-Date Fund Series Report | 09-30-2016 | For Financial Professional Use Only.
T. Rowe Price Retirement Target-Date Fund Series Report
The experience and tenure of T. Rowe's asset-alloca-tion group and the strength of the underlying fundslead to a Positive People rating. T. Rowe added to itsasset-allocation group in mid-2015 with the hire of Se-bastien Page, a transplant from PIMCO. Along withRich Whitney, Page leads the teams in charge of thefirm's asset-allocation strategies. Whitney continuesin his role as chair of the firm's asset-allocation com-mittee, which guides the tactical decisions for thesetarget-date funds. The committee has a successfullong-term record on the firm's asset-allocation prod-ucts, including the Spectrum and Personal Strategyfunds. The group's membership includes leaders fromthe firm's equity and fixed-income funds, and most ofthe members have spent the majority of their careersat the firm.
Jerome Clark, a T. Rowe veteran and asset-allocationcommittee member, runs the funds' day-to-day opera-tions. Clark joined the firm in 1992 and launchedwhat is now its college-savings plan before takingthe reins here. Wyatt Lee, a longtime associate toClark, officially joined the manager roster in August2015. Kim DeDominicis assists Clark and Lee. The as-
set-allocation team has grown with three net hiressince 2014 and currently stands at 24 members. Clarkand the allocation team were nominated for Morning-star's 2012 Allocation Fund Manager of the YearAward. Although he does not invest directly in the tar-get-date mutual funds, Clark has more than $1 mil-lion invested in T. Rowe's similarly managed target-date collective trusts according to T. Rowe's compli-ance department.
The underlying fund managers used in the series arealso a sound bunch. The more than nine-year averagemanager tenure of the series' underlying funds landswell ahead of the mutual fund industry's average. T.Rowe has a history of handling manager changes forthe underlying funds well, with a long transition peri-od being the norm. T. Rowe Price Growth Stock repre-sents one of the rare exceptions: Former managerRob Bartolo unexpectedly resigned from the firm in mid-January 2014. His successor, Joe Fath, who servedas assistant portfolio manager on another large-growth fund at the firm from 2008 to 2014, took overthe portfolio.
Series Management
Manager Start DateJerome Clark 09-2002Wyatt Lee 08-2015
Average Tenure 7.7 yearsLongest Tenure 14.1 yearsTarget-Date Industry
Average Tenure 4.6 years
Underlying Funds' ManagementAverage Tenure 8.8 yearsLongest Tenure 24.3 yearsMutual Fund Industry
Average Tenure 6.6 years
Parent Rating: Positive
T. Rowe Price is an industry leader, with a strong line-up of funds across asset classes. The firm's disci-plined, risk-conscious investment process has consis-tently produced successful results across its fund line-up, often with less volatility than peers. Many manag-ers spend their careers at the firm, providing continui-ty for fund shareholders. Manager retirements are typ-ically announced well in advance, allowing for a longtransition process.
After a few unexpected departures of top managersin 2013 and 2014 and an uptick in analyst departureson the U.S. equity team, the pace of turnover hasslowed. The departure of head of fixed income MikeGitlin was a surprise, but the firm quickly filled the
role with 31-year T. Rowe Price veteran Ted Wiese.Other executive changes have been handled withease, including that of CEO James Kennedy, who willbe succeeded by Bill Stromberg in 2016. Meanwhile,the firm is in a strong financial position and remainsamply resourced.
T. Rowe Price has acted in fundholders' interests byclosing funds with surging asset bases and avoidingtrendy fund launches. Reasonable fees and a manag-er compensation plan focused on long-term perform-ance are other pluses. One area of weakness is man-ager ownership of fund shares, which is not amongthe industry's best and could stand to improve.
Fund Family Data
Average Overall Star Rating QQQQ
% of Assets w/Star Rating 94.3%
Assets (listed in USD $Mil)
Total Assets Under Mgt 641,269
Average Manager Tenure 7.1 years5-year Manager Retention
Rate (%) 93.8%Manager Investment Over
1 Million USD (% Assets) 30.0%
Average Fee Level (%) 38.0%
3-year Firm SuccessRatio (%) 86.0%
Page 5 of 5 | Morningstar Target-Date Fund Series Report | 09-30-2016 | For Financial Professional Use Only.
T. Rowe Price Retirement Target-Date Fund Series Report
Alger Capital AppreciationFund Class Z $23,394.06Large Growth $18,678.23S&P 500 TR USD $19,713.40
Investment Strategy
The investment seeks long-term capital appreciation. The fund invests at least 85% of its net assets, plus any borrowings forinvestment purposes, in equity securities of companies of any market capitalization that Fred Alger Management, Inc. believesdemonstrate promising growth potential. It can leverage, that is, borrow money to buy additional securities. The fund can in-vest in foreign securities.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,406 10,201 11,490 12,796 19,686 23,394Fund 4.06 2.01 14.90 8.57 14.51 8.87+/- S&P 500 TR USD 2.39 1.73 -8.09 -1.47 0.05 1.85+/- Category 0.84 0.51 -1.61 1.22 1.50 1.86% Rank in Cat 20 25 67 29 19 —# of Funds in Cat 1,520 1,513 1,464 1,316 1,156 808* Currency is displayed in BASE
Top Holdings 10-31-2016Weight % Last Price Day Chg % 52 Week Range
Alphabet Inc C 8.18 803.76 BASE -0.52 [ 663.06 - 816.68
T Amazon.com Inc 5.58 810.01 BASE -0.88 [ 474.00 - 847.21
Y Apple Inc 5.55 119.94 BASE 0.77 ] 89.47 - 119.96
T Microsoft Corp 5.49 62.31 BASE -0.61 [ 48.03 - 64.10Facebook Inc A 5.07 127.80 BASE -0.40 [ 89.37 - 133.50
% Assets in Top 5 Holdings 29.86
TIncrease YDecrease RNew to Portfolio
Top Sectors 10-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 39.17 39.17 30.16 28.59
d Healthcare 16.09 21.38 16.09 16.61
t Consumer Cyclical 14.08 18.61 13.65 18.07
s Consumer Defensive 8.68 8.68 4.10 7.46
p Industrials 8.26 12.97 8.26 9.95
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Success and the challenge of size.By Alec Lucas 12/22/2016
Alger Capital Appreciation has a Morningstar Ana-lyst Rating of Bronze because lead managerPatrick Kelly has proved skilled at executingAlger's aggressive-growth, high-turnover ap-proach. From Kelly's 2004 start date throughNovember 2016, the fund's 11.2% annualized gainbeat the Russell 1000 Growth Index by 2.5 per-centage points and outpaced all but four large-growth Morningstar Category peers.
Lofty fees have always been a hurdle for Kelly, butin recent years he's also faced the challenge ofsize. Per Statement of Additional Information dis-closures, Kelly has managed more than $15 billionacross all accounts since late 2014, versus lessthan one third that figure at year-end 2009.
The increase in assets here has coincided with amove up the market-cap spectrum. Between late2004 and late 2009, when the fund and its open-end clones together had less than $2 billion in as-sets, the fund's combined small- and mid-capstake was on average 17.4 percentage points morethan the Russell 1000 Growth Index's. The now$6.4 billion Alger Capital Appreciation open-endlineup has been consistently underweight since2010, however. As of September 2016, this fundhad a 12% small- and mid-cap stake, versus theindex's 20%.
The fund still has an aggressive edge. With 43%of assets in it top 10 holdings, as of September2016, the fund was more top-heavy than threefourths of its peers. Sector bets remained sizable,too. Its 40.4% tech weighting was nearly 9 per-centage more than the index's.
The fund's willingness to stand out has been a li-ability of late. Through November 2016, its 0.2%year-to-date loss trailed the index by 6 percentagepoints, and the fund was on pace for its worst cal-endar-year showing versus the benchmark since2008. The fund's calendar-year returns under Kellyhave otherwise been competitive, though, includ-
ing crushing the index from 2005-07 and in 2009while edging it from 2012-15.
The huge chunk of assets Kelly now manages willmake difficult to build on his long-term record. Yet,with his skill, experience, and ability to adapt, heshould have a good shot.
Process Pillar: ∞ PositiveLead manager Patrick Kelly's skilled use of Alger'saggressive-growth approach to investing merits aPositive Process Pillar rating. Like his colleagues,Kelly looks for companies that are poised forgrowth in one of two stages. Some have high unitvolume growth leading to increased product de-mand and market share, like search-engine giantAlphabet GOOG. Others undergo positive lifecyclechanges, such as benefiting from new manage-ment or product advancements. Apple AAPL, withits series of innovative iPhone, iPad, and Apple Paylaunches, is an example.
Kelly taps Alger's team of analysts to find grow-ing firms within their respective sectors. The ana-lysts come up with one-, three-, and five-year tar-get prices for each firm, modeling earnings andcash flows over five years. Kelly ultimately picksthe stocks that he thinks have the most upside po-tential relative to their price targets and is willingto deviate meaningfully from the Russell 1000Growth Index's sector weightings. He monitorsrisk/reward trade-offs and often trims positionsafter they come within 10% of their price targets,which is one reason for the portfolio's above-aver-age, triple-digit annual turnover. Kelly is willing topay up for growth, but the portfolio's average pricemultiples tend to be in line with and sometimesbelow the benchmark's and typical rival's, suggest-ing that he's not insensitive to valuation.
The portfolio's exposure to stocks at the lower endof the market-cap spectrum is less pronouncedthan in the past. Between late 2004 and late 2009,when the fund and its open-end clones togetherhad less than $2 billion in assets, the fund's com-bined small- and mid-cap stake was on average17.4 percentage points more than the Russell 1000Growth Index's. The $6.4 billion Alger Capital Ap-
preciation open-end lineup has been consistentlyunderweight since 2010, however. As of Septem-ber 2016, this fund had a 12% small- and mid-capstake, versus the index's 20%.
The portfolio isn't tame, though. It has becomemore top-heavy since mid-2014, and its 43% stakein its top 10 holdings, as of September 2016,ranked in the large-growth category's top quartile.Sector bets can still be sizable, too. The fund's40.4% tech weighting was nearly 9 percentagemore than the index's. Four the top five holdingswere tech titans, including Alphabet, with tech-de-pendent retailer Amazon.com AMZN as the loneexception. Each position reflects management'soptimism about firms poised to benefit from in-creases in Internet usage.
Although the portfolio sits squarely in the large-growth section of the Morningstar Style Box, someholdings cross into value. The fund's 0.7% stake inAir Products & Chemicals APD, as of September2016, is an example. It should benefit from risingNorth American oil and gas production.
Performance Pillar: ∞ PositiveA topnotch, albeit volatile, record under lead man-ager Patrick Kelly earns the fund a Positive Per-formance Pillar rating. Since Kelly took the helm inlate September 2004, the fund's 11.2% annual-ized return through November 2016 beat the Rus-sell 1000 Growth Index by 2.5 percentage pointsand earned the large-growth category's fifth spot,while Kelly's other charge, Alger Spectra ALARX,placed first.
Kelly's aggressive tactics can pay off handsomelyin rallies but lead to sizable losses in downturns.The fund posted top-decile calendar-year returnsamong large-growth peers in 2005-07, as well asin 2009's rebound, but fared worse than roughlyfour fifths of rivals in 2008. That year Kelly boughtspeculative fare like JA Solar JASO, which did nothave positive cash flows, and was too slow to sellamid the burgeoning credit crisis.
Since year-end 2009, performance has moderatedbut remained competitive overall. The fund edged
the benchmark and its typical rival each calendaryear from 2012 to 2015. Through November 2016,however, its 0.2% year-to-date loss trailed the in-dex by 6 percentage points, and the fund was onpace for its worst calendar-year showing versusthe benchmark since 2008. Stock-picking has beenpoor, especially in tech. Healthcare stocks alsohurt, including top-20 positions in Allergan AGNand Vertex Pharmaceuticals VRTX to begin theyear.
People Pillar: ∞ PositiveThe fund's Positive People Pillar rating reflectslead manager Patrick Kelly's talent and experi-ence. Since taking the helm here and at AlgerSpectra SPECX in late September 2004, his firstshot at portfolio management, Kelly has executedthe firm's aggressive approach with great success.This fund and Spectra, its more flexible counter-part, have consistently been top performers in thelarge-growth category.
In June 2015, the firm tapped Ankur Crawford toassist Kelly as comanager on both funds. Shejoined Alger around the time Kelly took over here.Crawford subsequently completed Alger's in-housetraining program, the same one Kelly went throughin the late 1990s, and like Kelly, she worked ini-tially as a tech analyst. She's been a portfoliomanager on Alger Mid Cap Growth AMCGX and itsclones since November 2010. They have not faredas well as Kelly's funds have during her tenure,but significant turnover among Crawford's coman-agers make them an imperfect gauge of her man-agement abilities.
Kelly and Crawford draw support from roughly 20analysts who divide coverage based on global sec-tors and regions. About a third of the analystshave less than 15 years of industry experiencewhile the rest have more than 20 years.
Kelly has at least $50,000 in the Alger Capital Ap-preciation strategy and Crawford at least $20,000.Kelly also invests over $1 million in Alger Spectra.
Parent Pillar: ¶ NeutralEstablished in 1964 as a growth shop, privatelyheld Fred Alger Management has overcome a
great deal since the early 2000s. Its World TradeCenter headquarters were decimated on 9/11,claiming the lives of most of the firm’s investmentstaff, including David Alger, the founder’s brotherand manager of Alger Spectra SPECX, which SmartMoney magazine praised as the most successfulmutual fund of the 1990s. Alumni returned to helprebuild the firm, but soon afterward it was implic-ated in the market-timing and late-trading scandalof 2003. Alger settled those charges by 2007. Witha bolstered compliance department, it has had aclean regulatory record since. Spectra has re-turned to prominence as it has consistently been atop-performing large-cap growth fund since man-ager Patrick Kelly took the helm in September2004.
Kelly’s Alger Capital Appreciation ALARX has alsoexcelled, but the firm has had less success run-ning other strategies. That could change, though,with the early 2015 addition of veteran small-capmanager Amy Zhang. She had a stellar record ather previous firm and is off to a good start at Al-ger using the same benchmark-agnostic, low-turnover strategy. While Zhang’s addition is prom-ising, Alger has room for improvement in otherareas. Fees are above average, and overall man-ager investment is weak, as is that of independ-ent board members. Only two of five invest in Al-ger funds.
Price Pillar: § NegativeFees have come down the past few years but re-main lofty compared with most rivals', earning thefund a Negative Price Pillar rating. The A shares'1.23% fiscal 2015 expense ratio, which applied toover half the fund's asset base, was 6 basis pointsabove the large-cap, front-load peer median. Thatranked in the most expensive third of those peers.At 0.90%, the Z shares were more competitivelypriced, but their $500,000 minimum investmentplaces them in the large-cap institutional fee-levelcomparison group. As a result, they too have anabove-average price tag.
Investors also face ample trading costs thanks tothe fund's triple-digit annual portfolio turnover. Infiscal 2015, brokerage fees of nearly 0.12% of av-
American Funds NewPerspective Fund® Class R-6$18,526.99World Stock $14,366.67MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks long-term growth of capital; future income is a secondary objective. The fund seeks to take advantage ofinvestment opportunities generated by changes in international trade patterns and economic and political relationships by in-vesting in common stocks of companies located around the world. In pursuing its primary investment objective, it investsprimarily in common stocks that the investment adviser believes have the potential for growth. In pursuing its secondary object-ive, the fund invests in common stocks of companies with the potential to pay dividends in the future.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,334 10,155 11,506 11,696 17,433 18,527Fund 3.34 1.55 15.06 5.36 11.76 6.36+/- MSCI ACWI Ex USA NRUSD
1.03 -1.67 -2.83 6.18 6.57 5.12
+/- Category 0.78 0.21 -1.94 2.03 2.40 2.46% Rank in Cat 14 33 63 16 11 —# of Funds in Cat 1,115 1,112 1,015 853 670 372* Currency is displayed in BASE
Top Holdings 09-30-2016Weight % Last Price Day Chg % 52 Week Range
Y Amazon.com Inc 4.54 810.11 BASE -0.87 [ 474.00 - 847.21Novo Nordisk A/S B 3.75 250.20 BASE -0.79 [ 218.20 - 391.30Naspers Ltd Class N 1.87 — BASE -0.47 [ 168,594.00 -
Cash 1.86US Stock 47.54Non US Stock 44.45Bond 1.85Other 4.31
ManagementStart Date
Robert W. Lovelace 12-01-2000Jonathan Knowles 12-01-2004Brady L. Enright 12-01-2005Joanna F. Jonsson 12-01-2005Steven T. Watson 12-01-2005Isabelle de Wismes 12-01-2007Noriko H. Chen 04-30-2012
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Seeking growth across the globe.By Alec Lucas 12/29/2016
American Funds New Perspective has a Morning-star Analyst Rating of Gold for its ability to profitfrom changes in global trade.
Outperformance has been its norm. The fund'strailing returns for the three- to 15-year periodsthrough November 2016 all rank in the world-stockMorningstar Category's top quartile or better. Al-though on pace for a bottom-third showing in2016, the fund finished in the top half of the peergroup in every other calendar year over the pastdecade.
Focusing on multinational blue chips and treadingcarefully in emerging markets has helped the fundachieve this record. The managers seek growthacross the globe but buy when it is mispriced ormisunderstood, often hanging on through sub-sequent rough patches. They built most of thefund's now top-five position in diabetes drug-maker Novo Nordisk NOVO B in mid-2009 and heldfast in 2016 as concerns about pricing pressure inthe U.S. caused Novo's stock to drop. The firm'slong-term growth, though, will most likely befueled by emerging markets, whose rising middleclass will become more prone to diabetes as itsdiet westernizes. Moreover, since the fund firstbought Novo in mid-2009, its stock has trouncedthe fund's benchmark.
The fund's seven-person team is stable and experi-enced. Longest-tenured manager Robert Lovelacehas run diversified money in the fund for morethan 15 years and spent 14 years prior to that asan analyst for the fund. With her 2012 start date,manager Noriko Chen is the least tenured; but shehas been in the industry nearly 25 years.
The firm's multimanager system is another plus.Each manager oversees a separate sleeve of theportfolio in line with his or her own style. Jonath-an Knowles, for example, runs a very top-heavyportfolio of about 30 stocks with high returns onequity, while Steven Watson can be quite contrari-
an in his more diffuse portfolio of 50-60 stocks.The combination of varied sleeves mutes volatilityfor the fund as a whole and helps it to fare well indifferent market conditions.
The fund's next decade may not top its prior one,but its strategy and team breed confidence.
Process Pillar: ∞ PositiveThe fund's singular focus combined with its will-ingness to adapt merit a Positive Process Pillar rat-ing. Since its March 1973 inception, the fund hassought to invest in firms poised to benefit fromchanging global trade patterns. While that mis-sion has endured, the fund's methods haveevolved with the market. In its early days, the in-vestable universe consisted largely of the constitu-ents of the MSCI World Index, the fund's longtimebenchmark. As the global opportunity setbroadened to include developing markets, the fundbegan investing there, too, and in October 2011changed its benchmark to the MSCI All-CountryWorld Index. The fund can now invest in firms loc-ated anywhere in the world if they receive at least25% of their revenues from outside their home re-gion and have at least a $5 billion market cap attime of purchase. Although those requirementslend themselves to a continued emphasis on de-veloped-markets blue chips, the fund has laid thefoundation for increasing its emerging-markets ex-posure beyond its mid- to upper-single-digit histor-ical norm.
American's multimanager approach lets the man-agers play to their strengths. With distinct styles,they can invest in their best ideas or hold cash andwait for compelling opportunities. Meanwhile, thecombination of separately managed sleeves mutesthe overall fund's volatility. Only high turnover isfrowned upon.
Sector and geographic allocations in the fund'sroughly 250-stock portfolio are largely a byproductof its managers' bottom-up analysis. The fund'sbalance of domestic and foreign stocks also shiftsbased on where the managers see the best oppor-tunities. Its helping of U.S. stocks has ranged frommore than half to less than a fourth of assets dur-
American Funds New Perspective Fund® Class R-6 RNPGX
Analysis
ing the past three decades and stood at 48% inNovember 2016, up from less than 30% near theU.S. market's 2007 peak.
The fund's managers seek growth across the globebut buy when it is mispriced or misunderstood, of-ten hanging on through subsequent rough patches.They built most of the fund's now top-five positionin diabetes drugmaker Novo Nordisk in mid-2009and held fast in 2016 as concerns about pricingpressure in the U.S. caused Novo's stock to drop.The firm's long-term growth, though, will mostlikely be fueled by emerging markets, whose risingmiddle class will become more prone to diabetesas its diet westernizes.
The fund doesn't get carried away, either. Al-though its 20.7% tech stake, as of late 2016,roughly doubled the portfolio's year-end 2012weighting, the managers have sought firms whosecompetitive advantages give them a long-termedge. Top-10 holding Facebook FB, for example,has a wide Morningstar Economic Moat Rating be-cause its sites and apps enable the firm to com-pile user data that advertisers covet.
Performance Pillar: ∞ PositiveConsistent outperformance earns the fund a Posit-ive Performance Pillar rating. Its trailing returns forthe three- to 15-year periods through November2016 all rank in the world-stock category's topquartile or better. Although on pace for a bottom-third showing in 2016, the fund has finished in thetop half of the peer group in every other calendaryear over the past decade. Since its 1973 incep-tion and over longest-tenured manager RobertLovelace's 15-plus years, it has trounced its typic-al category rival, the MSCI All-Country World In-dex, and its former benchmark, the MSCI World In-dex.
The fund has amassed this record without incur-ring more volatility than its average peer or index.In fact, its Morningstar Risk ratings are below av-erage for the trailing five- and 10-year periodsthrough November 2016. It also has capturednearly 105% of the MSCI All-Country WorldIndex's upside and 93% of its downside since
Lovelace joined the fund in December 2000.
The fund's focus on multinational blue chips hasseldom hurt shareholders. In its 40-plus calendaryears, the fund has lost money in only seven (1974,1990, 2000-02, 2008, 2011). In each of those yearsthe fund lost significantly less than the benchmark,except for 2011. Even then, the fund held its ownduring 2011's peak-to-trough plunge but lagged inthe subsequent rebound and lost 7.6% for theyear, versus the index's 5.5% drop.
People Pillar: ∞ PositiveAmerican Funds' multimanager approach helps tohandle this fund's $60 billion asset base, theworld-stock category's second largest. The fund'sPositive People Pillar rating reflects its systemicstrengths as well as the managers' experience,ability, and aligned interests.
Capital Group, the parent of American Funds, di-vides these assets between management teamsfrom subsidiaries Capital World Investors and Cap-ital International Investors. Joanna Jonsson over-sees CWI's team of Jonathan Knowles, Brady En-right, and Isabelle de Wismes. Longest-tenuredmanager Robert Lovelace heads up CII's team,which includes Noriko Chen and Steven Watson,who had been a CWI manager here prior to Octo-ber 2015. Each of the managers, based in theUnited States, England, and Asia, oversees a sep-arate sleeve of the portfolio, with Jonsson andLovelace helping to ensure that their investingstyles complement one another. For example,Knowles runs a very top-heavy portfolio of about30 stocks with high returns on equity, while Wat-son sticks largely to value names in a more dif-fuse portfolio of 50-60 stocks. They're a veterangroup. Each manager has been in the industry forat least two decades. The CWI and CII teams areboth supported by about 40 analysts, with eachanalyst group also responsible for its own slice ofthe portfolio.
Each manager has at least $100,000 in the fund,with three investing more than $1 million.
Parent Pillar: ∞ PositiveCapital Group and its subsidiaries, including Amer-
ican Funds, remain among the industry's strongeststewards of investors' capital. The firm boasts ex-perienced and long-tenured investment teams,which have the incentives in place to do right byinvestors, as well as funds with generally stronglong-term track records that are offered at attract-ive prices. The firm readily earns its Positive Par-ent rating.
That care and performance have won CapitalGroup both investors and assets, and the firm isamong the world's largest asset managers. Stay-ing on top isn't a forgone conclusion, so the firmhas been active in recent years trying to maintainits position. For example, relatively new goals-based funds have helped stem six years of out-flows. Expanding its salesforce around the worldhas also helped, including growing its U.S.wholesaling force by almost a third to 150-strong.
Despite growth in the sales group, investment per-sonnel remain firmly in control of Capital Group'sstrategic direction. That's apparent in the intens-ity of resources committed to evolving the firm'ssignature multimanager system to work betteramid a changing fixed-income market. Recent mar-ket turbulence suggests the firm's modest goals--for fixed income to be a source of ballast ratherthan growth--are achievable. Still, investors shouldfollow in the steps of the firm's management teamand take the long view to decide how well thechanges work.
Price Pillar: ∞ PositiveThis fund is one of the cheapest broker-sold op-tions in the world-stock category, and it looks af-fordable when compared with no-load funds, too.The A shares, which hold more than half of thefund's assets, charged a 0.77% expense ratio infiscal 2016. That was 57 basis points below theworld-stock, front-load peer median and easilyranked in that group's cheapest decile. Plus, 15 ofthe fund's 17 other share classes sported bottom-quintile expense ratios versus similarly distributedrivals, while the two exceptions (together account-ing for 1% of assets) had below-average price
American Funds New Perspective Fund® Class R-6 RNPGX
Analysis
tags.
Trading costs across all share classes were alsocomparatively modest. Brokerage fees of 0.03% ofaverage net assets in fiscal 2016 were less thanhalf the 0.07% category median.
Artisan International FundInvestor Class $12,354.46Foreign Large Growth$11,684.01MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks maximum long-term capital growth. The fund invests primarily in developed markets but also may investup to 35% of the fund's total assets at market value at the time of purchase in emerging and less developed markets. Undernormal market conditions, it is substantially fully invested in common stocks and similar securities, and invests at least 65% ofits net assets at market value at the time of purchase in securities of non-U.S. companies.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,351 10,192 10,086 9,061 13,774 12,354Fund 3.51 1.92 0.86 -3.23 6.61 2.14+/- MSCI ACWI Ex USA NRUSD
1.20 -1.29 -17.03 -2.41 1.43 0.89
+/- Category 0.45 -0.27 -7.73 -2.72 0.11 0.36% Rank in Cat 24 61 98 92 51 46# of Funds in Cat 395 394 363 312 260 182* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
Y Linde AG 4.37 153.45 BASE 0.23 ] 113.50 - 166.00
R Deutsche Boerse AG 4.14 78.07 BASE -0.01 [ 66.94 - 80.56
Y Japan Tobacco Inc 4.11 — BASE -1.55 [ 3,627.00 - 4,850.00
T Allianz SE 3.90 160.20 BASE 0.28 ] 118.35 - 162.00
Y Nestle SA 3.63 73.35 BASE -0.95 [ 72.20 - 74.90
% Assets in Top 5 Holdings 20.16
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 26.33 26.33 8.74 14.83
s Consumer Defensive 17.88 17.88 11.05 14.60
i CommunicationServices
13.31 15.34 7.43 3.35
p Industrials 11.99 13.32 7.23 12.86
r Basic Materials 8.45 8.94 6.22 6.61
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Its flexible approach can test investors' patience,
but this fund's virtues remain substantial.By Greg Carlson 6/8/2016
Artisan International's veteran leader, deep team,and sensible approach continue to earn a Morning-star Analyst Rating of Silver. This closed fund'slead skipper, Mark Yockey, has steered it for morethan 20 years, and the results have been superb:From its December 1995 inception through May2016, the fund surpassed all of its foreign large-growth peers, as well as 95% of the larger foreignlarge-blend Morningstar Category, on both a total-return and risk-adjusted basis. It also trounced itsMSCI EAFE benchmark as well as the MSCI EAFEGrowth Index (to which its returns have been a bitmore correlated).
Yockey has generated this stellar record utilizing aflexible approach. He invests in a mix of rapidlygrowing firms, more-mature and stable growers,and turnaround plays. The size of each group var-ies depending on where he and his team find themost opportunities, but the first two groups tendto predominate. In the late 1990s, the fund shonebecause of a hefty stake in tech and telecom.More recently, the fund’s hot streak from 2011-14was due in part to a move into Macau-relatedgaming stocks and other firms benefiting fromrising demand from Chinese consumers.
But the fund's shifts have also led to dry spells. Forexample, Yockey moved into beaten-downEuropean banks in 2009-10, only to see thosestocks drop further--a big reason the fund trailedmore than 85% of peers in 2010. More recently,the fund's stake in China-related stocks was onereason why it trailed 95% of peers in 2015. Anoth-er was poor stock selection in automotive firms,which has again weighed on returns in 2016. (U.K.auto-parts maker Delphi Automotive lost 20% forthe year to date through May 31.)
Thus, the fund requires patience at times. It's nowtilted toward steady growers--its China weightingdropped from 9.0% to 2.4% during the past year,while its stake in European staples firms such as
Unilever has nearly doubled. The fund has alsobeen quite rewarding over the long term, and thedepth of the team and a responsible approach tocapacity management (the fund closed to new in-vestors in 2015) trump concerns about modestlyabove-average fees.
Process Pillar: ∞ PositiveLead manager Mark Yockey is a growth investor atheart. But he's always spread the fund's assetsamong faster-growing, somewhat pricey compan-ies; higher-quality stable growers; and value plays,although the weightings of those three groupshave shifted over time. The stable growers havelately played a bigger role at times, which helpsexplain why the fund moved back to the foreignlarge-growth category in 2014 after residing in for-eign large-blend from 2010-13. Yockey investsloosely along themes, and the fund has alwayshad somewhat of an independent streak; regionaland sector weightings often stray significantlyfrom the norm, and emerging-markets exposurehas swung from minimal to 20% of assets overtime. Thus, returns have been less correlated tothe MSCI EAFE and the MSCI World ex USA in-dexes than those of the typical foreign large-blendor foreign large-growth fund. This distinctive ap-proach earns a Positive Process score.
The fund typically holds 60-100 stocks; the num-ber depends in part on how many compellingstocks Yockey finds, but the portfolio also becamemore diffuse in the mid-2000s when assets in thestrategy exceeded $25 billion. Strategy assetsreached $32 billion at the end of June 2015 (andare now about $28 billion), but the portfolio re-mains somewhat compact at 63 stocks.
Yockey trades around positions at times but willhold on to solid picks for years. Portfolio turnovertypically runs from 50% to 85%.
The fund owns a bigger slug of large-cap stocksthan usual, and its average market cap signific-antly exceeded both that of its MSCI EAFE bench-mark and the foreign large-growth norm at the endof March 2016. Yockey has generally found bettervalues among large caps lately, particularly in the
healthcare sector: Behemoths such as drugmakerBayer BAYN of Germany, U.S. device firmMedtronic MDT, and Swiss drugmaker Roche areamong the fund's top 25 holdings. (The fund'soverall stake in that sector was 20% of assets,well above the 13% category norm.) Other stocksnear the top of the portfolio with very large mar-ket caps included Japan Tobacco, Hong Kong-based insurer AIA Group, and food giant Nestle ofSwitzerland.
Yockey may also have a difficult time these daystaking a significant stake in a mid-cap stock; theteam ran a total of $28 billion in the strategy atthe end of April--strategy assets peaked at $33 bil-lion before recent outflows and investment losses,and the fund closed to new investors in 2015. (Ar-tisan has a long track record of closing its funds topreserve flexibility.) The number of holdings wasrecently 63 here, at the lower end of the fund'srange, so it doesn't appear the portfolio has beenaltered because of liquidity concerns. But thefund's large-cap-heavy profile could hold it back ifsmaller fare outperforms.
Performance Pillar: ∞ PositiveThis fund can run hot and cold, but it's been astrong performer over the long haul. It posted aspectacular run of performance in the late 1990sas manager Mark Yockey played the runup in tech,media, and telecom quite well. In the 2000s, thefund's returns weren't nearly as impressive (oneither an absolute or relative basis), but it stillturned in respectable performance. More recently,the fund notched three consecutive finishes in theforeign large-blend category's top decile from2011-13 before moving to foreign large growth andsurpassing 80% of that peer group in 2014. Sincethen, the fund has struggled, lagging 95% of peersin 2015 and 88% of them in 2016 through May.
Despite its recent malaise, from stocks' October2007 peak through May 2016 (arguably a full mar-ket cycle), the fund outpaced its MSCI EAFE bench-mark, the MSCI All Country World ex USA Index,and the growth-oriented versions of those indexeswhile beating more than 60% of peers. And thefund looks stellar across Yockey's full tenure. From
its late 1995 inception through May 2016, the fundhas crushed the foreign large-growth and foreignlarge-blend norms by 3.2 and 3.5 percentagepoints annualized, respectively. Although its re-turns have been volatile at times, the fund has out-paced all other foreign large-growth funds on arisk-adjusted basis when measured on Sortino andSharpe ratios. Thus, it earns a Positive Perform-ance rating.
People Pillar: ∞ PositiveAlthough this team lost a veteran in early 2013, itremains quite proven.
Mark Yockey has managed this fund since itsDecember 1995 inception. He's also run Artisan In-ternational Small Cap ARTJX, Artisan GlobalEquity ARTHX, and Artisan Global Small CapARTWX since their respective 2001, 2010, and2013 inceptions. Before Artisan, he managedWaddell & Reed International Growth UNCGX forsix years. All his charges boast fine results.
Andrew Euretig was named an associate managerhere in February 2012 and a comanager in Janu-ary 2013. He has comanaged Artisan Global Equitysince January 2013. He joined the team in 2005and covers industrials. Charles-Henri Hamker wasnamed an associate manager of this fund and Ar-tisan International Small Cap in February 2012. InJanuary 2013, he became a comanager of the lat-ter fund and Artisan Global Equity, and a coman-ager of Artisan Global Small Cap when it launchedin July 2013. He joined the team in 2000.
The trio is supported by 13 analysts and eight re-search associates. On average, the senior ana-lysts have worked on the team for six years.Yockey's long resume and the depth of his sup-porting cast earn a Positive rating for People.
Barry Dargan, a former MFS manager, comanagedArtisan Global Equity from its inception throughJanuary 2013 before leaving the firm.
Parent Pillar: ∞ PositiveArtisan hires proven or promising managers and
allows them to build and run their teams with alarge degree of autonomy. Four of the teams em-ploy investment strategies that are well-executedand have performed strongly over longer-term peri-ods. The firm's emerging-markets team has gener-ated mediocre results in its 8.5-year tenure, andtwo teams have launched since only early 2014.The firm tends to close funds to preserve theirflexibility and increase the chances that they willcontinue to outperform. Indeed, seven of the firm's15 funds are currently closed to new investors. Thefirm also has a clean regulatory history.
Artisan's board generally does a fine job, but itcould push the advisor to pass on economies ofscale through a more aggressive negotiation offees or management-fee breakpoints. The firm'sfunds aren't often priced well for their size.
On a positive note, all but two of Artisan's fundshave at least one manager with more than $1 mil-lion invested in fund shares, and seven have atleast two managers who invest heavily in theirfunds. That's the highest level of manager invest-ment disclosed to the SEC and an industry best-practice.
The firm went public in March 2013. While thiscould pressure management into keeping popularfunds open to boost revenue, it has thus far contin-ued to close them. Also, its executives retain tightcontrol of the firm.
Price Pillar: § NegativeThe 1.17% expense ratio of this fund's Investorshares, which hold 53% of the assets, earns aMorningstar Fee Level of Above Average. The In-stitutional shares hold 31% of the remaining as-sets, charge 0.95%, and earn an Average. Thefund's Advisor shares, launched in April 2015, hold16% of the assets, charge 1.07% and earn anAbove Average.
With assets of $17 billion, the fund is bigger thanthe vast majority of foreign large-cap funds, thusits expenses should be lower. It earns a NegativePrice rating.
Dodge & Cox InternationalStock Fund $12,813.76Foreign Large Blend$10,843.29MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks long-term growth of principal and income. Under normal circumstances, the fund will invest at least 80%of its total assets in equity securities of non-U.S. companies, including common stocks, depositary receipts evidencing owner-ship of common stocks, preferred stocks, securities convertible into common stocks, and securities that carry the right to buycommon stocks. The fund typically invests in medium-to-large well-established companies based on standards of the applic-able market.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,375 10,203 12,398 10,011 15,120 12,814Fund 3.75 2.03 23.98 0.04 8.62 2.51+/- MSCI ACWI Ex USA NRUSD
1.44 -1.18 6.09 0.86 3.43 1.27
+/- Category 0.72 0.10 12.46 0.83 2.45 1.60% Rank in Cat 12 35 1 31 8 15# of Funds in Cat 830 817 766 610 545 333* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
Y Samsung Electronics Co Ltd 4.47 — BASE 0.82 ] 1,088,000.00 -1,940,000.00
T Sanofi SA 3.68 75.96 BASE -1.11 [ 62.50 - 79.07
Y Naspers Ltd Class N 3.39 — BASE -0.47 [ 168,594.00 -255,359.00
Y Schlumberger Ltd 3.16 85.34 BASE 0.63 ] 59.60 - 87.00
Y Barclays PLC 2.89 232.70 BASE 0.69 ] 121.10 - 267.32
% Assets in Top 5 Holdings 17.59
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 24.84 25.73 24.84 9.73
y Financial Services 24.52 25.53 23.49 19.21
d Healthcare 13.88 13.92 13.88 10.17
t Consumer Cyclical 8.97 10.89 6.57 12.28
o Energy 8.56 8.56 5.91 5.23
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Cash 1.10US Stock 9.23Non US Stock 88.21Bond 0.00Other 1.47
ManagementStart Date
C. Bryan Cameron 05-01-2001Diana S. Strandberg 05-01-2001Mario C. DiPrisco 01-01-2004Roger G. Kuo 05-01-2006Keiko Horkan 05-01-2007Charles F. Pohl 05-01-2007Richard T. Callister 03-30-2012Englebert T.Bangayan 02-28-2015
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
conservative as one might think.By Gregg Wolper 12/19/2016
Dodge & Cox International Stock boasts manystrengths, including patience, low costs, and ahighly experienced and deep team of managersand analysts. Those attributes, along with astandout performance record, earn the fund aMorningstar Analyst Rating of Gold.
This fund endured an uncharacteristically subpar2015. It's not unusual for the fund to lag duringmarket downturns, though it didn't in 2014. Themanagers buy out-of-favor stocks when their long-term prospects remain strong, in the managers'view, and it's not unusual for such controversialstocks to fall hard if markets weaken. But the ex-tent of 2015's underperformance--the fund laggedthe foreign large-blend Morningstar Category aver-age by nearly 10 percentage points--was unusual.Its long-standing overweighting in emerging-mar-kets stocks bore much of the blame, as those mar-kets, and currencies, had a very rough year. Butthe managers stuck to their approach. They addedto some of the most beaten-up positions, such asbeleaguered Petrobras PBR, and have reaped thebenefits of this year's rebound in those positions.For the year to date through Nov. 30, 2016, thefund's 5.7% return tops the category average by 7percentage points and lands in the third percentile.
Fortunately for shareholders of this closed fund, itsstrong periods have far outweighed the downtimes. Moves such as buying major drug firmsyears ago when investors soured on them havefrequently paid off. That explains why the fund's10- and 15-year returns both land well into the cat-egory's top quartile and comfortably beat those ofthe MSCI ACWI Ex USA Index. And it's reassuringthat most of the fund's eight managers have beenon board since its 2001 inception, either as man-agers the whole time or as analysts who werethen promoted. They've used the same low-turnover, contrarian strategy the whole time. (An-nual turnover rates are consistently in the teens.)The fund's reasonable price is another attraction.
This fund thus holds much appeal--as long asshareholders understand that its calm, patient ap-proach does not protect against a bumpy ride.
Process Pillar: ∞ PositiveThis fund essentially uses a standard value-invest-ing approach but executes it with unusual dedica-tion and patience. Its managers look for compan-ies they consider undervalued versus their truelong-range worth. That often has led them to un-popular stocks, such as United States andEuropean drug giants when concerns about the ef-fects of lackluster drug pipelines were rampant, orindividual companies suffering from specific is-sues, such as Bank of America BAC or PetrobrasPBR. They typically stick with their holdings foryears. (This fund's turnover rate for 2015 was just18%, which is typical.)
The managers invest mostly in large-cap stocksand use bottom-up, fundamental research to de-termine which to invest in. They don't align coun-try or industry weightings with the indexes. Broad-er macroeconomic views or other high-levelfactors play lesser roles, though the managers doconsider issues such as potential legislation. Andone top-down opinion does influence the portfolio:The managers' conviction that faster growth ratesin emerging markets will be a long-term phe-nomenon that merits consistently tilting the portfo-lio strongly in that direction.
This fund does not hedge most of its foreign-cur-rency exposure into the U.S. dollar but will hedgeselectively when the managers feel a currency'svalue has moved far out of its normal range. Eventhen, they target only certain currencies and hedgejust a portion of that exposure.
Although some traits of this portfolio are unexcep-tional, this fund continues to have big differenceswith peers and indexes in some respects. In theSept. 30, 2016, portfolio, the fund has almost noexposure to consumer defensive stocks, eventhough those make up around 10% of the MSCIACWI ex-US Index and even more of the averagerival fund. The fund has roughly one fourth of theportfolio in technology sector, more than double
the stakes of the index and the typical peer. Andthe fund has more than 20% of its assets in emer-ging markets, a higher stake than the emerging-markets-heavy ACWI ex-US Index and about 3times the category average. The latter position de-rives from the managers' long-term belief thathigher growth rates in emerging markets meritsthat overweighting, despite the inevitable turmoil.On the individual stock level, the managers havemore than 4% of assets each in two stocks: Sam-sung Electronics, whose stock price surprisinglyhas had a stellar year despite the alarming head-lines, and Naspers, an Internet firm that has beena large holding since 2007. Also in the top 25, thefund still owns several long-held Big Pharmanames, including Sanofi SNY, Roche RHHBY, andNovartis NVS, even though the managers acknow-ledge pricing pressure especially in the U.S. OnSept. 30, the fund had 20% and 25% of its euroand Swiss franc exposure, respectively, hedged in-to the U.S. dollar, along with nearly all of its Chinaexposure.
Performance Pillar: ∞ PositiveThis fund bounced back from a poor showing in2015 to burnish its credentials as one of the topforeign-stock funds. Its broad commitment toemerging markets despite their struggles in prioryears, and to certain troubled holdings (with Petro-bras PBR a prime example), served it well. Strongrebounds by many pushed the fund to a top-decileranking in the foreign large-blend category for theyear to date through Nov. 30, 2016, even after lag-ging in the year's first half.
In 2015, its overweighting in emerging markets(and some other problems) had proved harmful, assentiment toward emerging markets soured andthe fund’s willingness to add to its stakes asprices fell deepened the damage in the short term.That's not the first time the fund has stumbled. In2011, for example, its outsize emerging-marketsstake, and other issues such as Nokia NOK, tooktheir toll in a rough year.
As these instances imply, the fund can be volatiledespite (or perhaps because of) its patient, value-oriented approach. However, the patience pays
off. The fund's return since its 2001 inception is farahead of the averages for the foreign large-blendand foreign large-value averages as well as theMSCI EAFE and the MSCI ACWI Ex USA indexes.Its five- and 10-year returns also beat all four bycomfortable margins. Its history thus instills con-fidence, but it shouldn't be considered a tamechoice.
People Pillar: ∞ PositiveFew funds can match this management team'sdepth and experience. An eight-person investmentpolicy committee, whose members have an aver-age tenure with the firm of 22 years, calls theshots at this fund. Several also serve on the com-mittees for Dodge & Cox Stock DODGX or Dodge &Cox Global Stock DODFX, and two managers--Charles Pohl and Diana Strandberg--serve on allthree committees. While the committees’ rostersare quite stable overall, changes do occasionallytake place. Englebert Bangayan, who joined thefirm in 2002, became a member of the committeein February 2015, and in June 2016, longtime com-mittee member Greg Serrurier retired.
The analyst ranks are also broad and deep, withsimilarly impressive levels of experience, at Dodge& Cox. As of Sept. 30, 2016, the firm had 34 in-dustry analysts and portfolio managers on theequity side, not including junior-level researchanalysts on two-year contracts. Twenty-nine ofthem had been at the firm for seven years or more.(There are another 26 managers and analysts withsimilar levels of experience on the fixed-incomeside who are consulted at times for this fund.)
San Francisco is the home base for the entire staff.Nearly all of the analysts and managers havespent their entire careers at Dodge & Cox. Indeed,managers and analysts rarely leave for any reasonbesides retirement.
Parent Pillar: ∞ PositiveDodge & Cox is an exemplary firm. CEO and pres-ident Dana Emery and chairman Charles Pohl arealso lead members of the investment team and runboth the firm and its funds with a long time hori-zon. The average fund manager tenure of morethan 20 years is exceeded only by a few boutiques
and is much higher than is typical for a large fundcompany.
There are no stars here; each fund is run collabor-atively by an investment policy committee. Ideascan come from any analyst but must survive ex-tensive peer review. Although the funds have seenoutflows in recent years, the firm has continued tobuild the investment team at a slow-and-steadyclip. It totals roughly 60 managers and analysts,most of whom become partners.
Dodge & Cox has rolled out only six strategiessince it first opened in 1931. The most recent is aglobal fixed-income offering that launched in May2014; the firm developed its foreign-bond capabil-ities as a natural extension of its international-equity expertise. While the firm has eschewedmarketing, it is among the largest mutual fundcompanies today. Asset growth can hinder execu-tion, but management has proved willing in thepast to safeguard its strategies by closing funds.
Managers are heavily invested in the funds andthe firm and have ample incentive to serve share-holders, as evinced by low costs, clear communic-ations, and a sober long-term approach.
Price Pillar: ∞ PositiveDodge & Cox International Stock is one of theleast-expensive actively managed foreign-stockfunds. It has one share class, which doesn't carry aload; its 2015 expense ratio (also listed in the May2016 prospectus) was 0.64%. A large asset base--around $55 billion at the end of November 2016--helps keep costs down. However, Dodge & Coxstarts out of the gate with low expenses by keep-ing its management fee modest, at just 60 basispoints.
The fund's consistently low turnover rate alsohelps keep down trading costs, which aren't in-cluded in the expense ratio. Overall, the fund getsa Positive Price rating.
The investment seeks capital appreciation. The fund normally invests primarily in common stocks. It invests in securities ofcompanies whose value the advisor believes is not fully recognized by the public. The fund invests in domestic and foreign is-suers. It invests in either "growth" stocks or "value" stocks or both. The fund uses fundamental analysis of factors such as eachissuer's financial condition and industry position, as well as market and economic conditions to select investments.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,368 10,160 11,631 12,689 19,127 21,804Fund 3.68 1.60 16.31 8.26 13.85 8.11+/- S&P 500 TR USD 2.01 1.32 -6.68 -1.77 -0.61 1.08+/- Category 0.46 0.10 -0.19 0.92 0.84 1.10% Rank in Cat 27 39 50 36 33 21# of Funds in Cat 1,520 1,513 1,464 1,316 1,156 808* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Last Price Day Chg % 52 Week Range
Y Facebook Inc A 5.91 127.82 BASE -0.38 [ 89.37 - 133.50
Y Berkshire Hathaway Inc A 5.18 — BASE -0.62 [ 186,900.00 -250,786.00
Y Amazon.com Inc 3.98 810.11 BASE -0.87 [ 474.00 - 847.21
Y Alphabet Inc A 3.56 826.54 BASE -0.48 [ 672.66 - 839.00
Y Alphabet Inc C 3.15 804.00 BASE -0.49 [ 663.06 - 816.68
% Assets in Top 5 Holdings 21.78
TIncrease YDecrease RNew to Portfolio
Top Sectors 11-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 33.25 33.25 22.82 28.18
y Financial Services 19.62 21.53 19.62 10.78
t Consumer Cyclical 18.24 19.63 14.68 17.69
d Healthcare 10.20 18.98 10.20 16.57
p Industrials 6.60 8.47 6.60 10.10
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Still solid.By Katie Rushkewicz Reichart, CFA 7/14/2016
Fidelity Contrafund maintains its Morningstar Ana-lyst Rating of Silver. Led by manager Will Danoffsince 1990, the $105 billion fund has long beenone of the industry's biggest by assets. The chal-lenges its size presents, plus fees that aren't aslow as might be expected given its economies ofscale, keep it from achieving a higher rating.However, the fund remains an attractive offeringthanks to Danoff's experience and consistent exe-cution through the years.
Danoff looks for companies poised to grow theirearnings, preferring solid business franchises withcapable management teams. As may be expectedfrom a growth fund, technology is the bulk of as-sets (recently 30%) and includes big bets on Al-phabet GOOGL, Facebook FB, and Amazon.comAMZN--the latter he doesn't mind paying up forgiven its success with Amazon Web Services andits growing market share in retail.
Top positions in the portfolio have largely re-mained intact for several years--turnover is moder-ate because of the fund's size--and include somefinancials names that aren't commonplace in oth-er large-growth Morningstar Category funds. Thefund has had a longtime bet on Berkshire Hath-away BRK.A and Wells Fargo WFC, though Danoffhas trimmed the latter as rate increases havefailed to materialize and earnings have remainedpressured. But the inclusion of such stocks hasdampened the fund's risk profile. Indeed, it's lostless than the Russell 1000 Growth Index in downmarkets and has been less volatile than large-growth peers under Danoff.
Danoff has Fidelity's large global analyst team athis disposal, which helps him keep tabs on thesprawling portfolio of 300-plus names and feedshim ideas that can help distinguish the fund fromits benchmark. The fund owns some privately heldcompanies, notably Uber and Pinterest. These re-main a small portion of the fund's overall assets,but investing in them early could prove beneficial
down the line if they have successful IPOs. Plus,they're another way the fund differentiates itselffrom popular passive funds.
Process Pillar: ∞ PositiveWill Danoff follows a typical growth strategy,looking for firms with improving earnings, but hisexecution sets the fund apart. He weaves togeth-er his own analytical insights, gleaned from nearly30 years at Fidelity, with research from 135 globalanalysts. As the biggest owner of many stocks,Danoff has unparalleled access to company man-agement, helping him understand a business'growth drivers. Capacity has long been a risk, giv-en that Danoff manages more than $100 billionacross accounts. (In 2013, Fidelity named JohnRoth as comanager at Danoff's other charge, Fidel-ity Advisor New Insights FINSX, which in the pastlooked very similar to Contrafund but has starteddeviating to a greater extent.) Even so, Contrafundis the second-biggest actively managed large-capfund and is often a top owner of its holdings, so itssize does limit its flexibility.
Danoff has made tweaks to the process throughthe years to accommodate its growing size, includ-ing trading less often, owning fewer mid- andsmall-cap names, and maintaining a portfolio of270-500 stocks. (The name count has trendeddownward recently as Danoff has focused on hisbest ideas.) These moves haven't affected long-term performance, which remains strong. The fundhas been closed in the past but is currently openand has experienced outflows in recent years.
Danoff's consistent execution through the yearsearns the fund a Positive Process rating.
Despite the fund's large asset base and portfolioof hundreds of names, it has avoided looking toomarketlike. The fund has held as much as 20% innon-U.S. equities in the past, though its 8% non-U.S. stake as of May was on the low end of itsnormal range during the past decade.
While the fund's size limits Danoff's ability to takemeaningful positions throughout the portfolio, hedoesn't shy away from making big bets where he
can. Alphabet GOOGL and Berkshire HathawayBRK.A are long-standing bets in the portfolio, eachat more than 4% of assets as of May. Facebook isa top-five position based on Danoff's belief that itis a great franchise with excellent management.Technology remains the biggest sector weighting,at 30% of assets, and is a sector where the fundhas done well in the long term. He's closelywatching valuations at Amazon.com AMZN andmanagement's execution at Alphabet but is com-fortable with big positions in both companies.
The fund's 15% financials stake is above thelarge-growth norm (though similar to its S&P 500prospectus benchmark) and includes top picks,such as longtime holding Wells Fargo WFC.However, Danoff has trimmed the banks as in-terest rates haven't risen as expected. The fundhas stakes in some private technology companies,including Uber, Pinterest, and Airbnb, though theseare a small percentage of overall assets.
Performance Pillar: ∞ PositiveThis fund has been a top large-growth offering un-der Will Danoff, who has managed it sinceSeptember 1990. During his tenure through June2016, the fund has gained 12.7% annualized to theS&P 500's 9.9%, the Russell 1000 Growth Index's9.3%, and the category's 8.6%. Danoff's record isall the more impressive considering the huge sumof money he oversees, totaling more than $100 bil-lion. Undoubtedly, this fund is less flexible thanthe $6 billion Fidelity Series Opportunistic Insightsused exclusively in Fidelity's target-date series,which he's led to even better results since its late-2012 inception.
This fund isn't too volatile for a growth fund. Dan-off, who has run money long enough to witness afew major market blowups, has outperformedlarge-growth peers and the Russell 1000 GrowthIndex in down markets during his tenure, includingin both bear markets of the 2000s. The fund'sMorningstar Risk score, which penalizes down-side deviations in returns, is low. Danoff prefersproven growers showing tangible signs of improv-ing earnings to more-speculative fare, whichmeans the fund can lag in certain market environ-
ments, such as 2009's rally. It's lagged its bench-mark during the past year through June, draggeddown by consumer and financials picks, includingChipotle CMG and Associated British Foods ABF.However, the fund's strong long-term record re-mains intact and earns a Positive Performance rat-ing.
People Pillar: ∞ PositiveWill Danoff has run this fund since September1990. On his watch, Contrafund has been one ofthe top-performing large-growth funds, even as ithas grown in size. While Danoff's years of experi-ence and stock-picking abilities have given thefund an edge and support its Positive People rat-ing, he also relies on Fidelity's global analyst staffof 135. The analysts' input is essential, as it wouldbe difficult to effectively oversee a portfolio of300-500 stocks himself. The analysts have incent-ives to relay their best ideas to him, as he com-mands more than $100 billion in assets across allhis charges. But Danoff is actively involved instock-specific research and carries around a thicknotebook listing the tickers of companies he's metwith.
Given Danoff's heavy asset load, capacity hasbeen a long-standing concern. Fidelity has takensmall steps to address that, naming John Roth asDanoff's comanager at the $25 billion Fidelity Ad-visor New Insights FINSX in September 2013. Thatwon't take too much off Danoff's plate, as he re-cently started running Fidelity Series Opportunist-ic Insights ($6 billion in assets as of June), whichis used exclusively in the target-date series. Rothmay be viewed as the heir apparent here, given hewas handpicked by Danoff, but the latter has an-nounced no intention of retiring soon. Danoff in-vests more than $1 million in both this fund and Fi-delity Advisor New Insights.
Parent Pillar: ∞ PositiveIndustry giant Fidelity is well resourced and re-mains an industry leader in technology, trading,and its brokerage platform. Its fixed-income divi-sion has been stable and features funds withstrong long-term risk-adjusted records. Thesprawling equity lineup hasn't always been asconsistent beyond some of its most well-known
managers. But the equity division has shown signsof stabilizing since the 2007-09 financial crisis.Performance and manager tenure have improved,and Fidelity has handled manager changes morecarefully. The equity analyst team is now more ex-perienced overall, and there's evidence that thebuild-out of the international-equity team hasborne fruit. The effort to carve out value andequity-income teams should serve investors well.
Even so, the huge fund lineup leaves room forsome mediocre funds. The firm also has much toprove with its revamped target-date funds, whichhave lost market share to competitors followingweak performance and have since undergone man-agement changes and process tweaks.
Still, Fidelity is headed in the right direction. Thefunds’ boards and managers have made consist-ent performance and manager ownership a prior-ity. The lineup remains reasonably priced. Improve-ments on the equity side are encouraging, and itsfixed-income funds remain among the industry'sbest. Fidelity earns a Positive Parent rating.
Price Pillar: ∞ PositiveThis fund has a performance fee, so its expenseratio can change based on how its three-year re-turns look relative to the S&P 500. (For every per-centage point of out- or underperformance, the ex-pense ratio is adjusted by 0.02%, up to a maxim-um of 0.20%.) The performance-based fee is in theinterest of investors, who don't have to pay asmuch when the fund is underperforming. Thefund's Price Pillar rating is determined withoutconsidering the performance adjustment. The no-load and K shares are priced below average relat-ive to similarly sold peers, so the fund receives aPositive Price rating. Expenses have ranged from0.64% to 1.01% during the past decade; the latteris hard to justify given the fund's huge asset base.Currently the no-load shares cost 0.70%.
Franklin Mutual GlobalDiscovery Fund Class Z$17,814.02World Stock $14,366.67MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks capital appreciation. The fund invests primarily in equity securities (including securities convertible into,or that the investment manager expects to be exchanged for, common or preferred stock) of U.S. and foreign companies thatthe investment manager believes are available at market prices less than their value based on certain recognized or objectivecriteria (intrinsic value). The equity securities in which it invests are primarily common stock. It may invest substantially and po-tentially up to 100% of its assets in foreign securities.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,199 10,184 12,312 11,786 16,531 17,814Fund 1.99 1.84 23.12 5.63 10.58 5.94+/- MSCI ACWI Ex USA NRUSD
-0.32 -1.37 5.23 6.45 5.39 4.70
+/- Category -0.57 0.51 6.12 2.30 1.22 2.05% Rank in Cat 72 21 11 14 25 9# of Funds in Cat 1,115 1,112 1,015 853 670 372* Currency is displayed in BASE
Top Holdings 09-30-2016Weight % Last Price Day Chg % 52 Week Range
Microsoft Corp 2.69 62.32 BASE -0.59 [ 48.03 - 64.10Merck & Co Inc 2.53 61.42 BASE -1.46 [ 47.97 - 65.46Medtronic PLC 2.10 75.16 BASE 0.11 ] 69.35 - 89.27Royal Dutch Shell PLC Class A 1.76 — BASE -1.32 [ 1,256.00 - 2,295.50Novartis AG ADR 1.75 71.37 BASE -1.44 [ 66.93 - 83.58
% Assets in Top 5 Holdings 10.83
TIncrease YDecrease RNew to Portfolio
Top Sectors 09-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 25.03 29.60 25.03 15.29
d Healthcare 15.01 15.01 13.24 12.95
a Technology 14.32 14.32 11.73 17.28
t Consumer Cyclical 11.70 12.06 11.70 13.00
s Consumer Defensive 8.84 9.81 8.84 11.19
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Bargain-hunting can be a pain.By Alec Lucas 4/14/2016
Franklin Mutual Global Discovery has earned aMorningstar Analyst Rating of Silver for stayingtrue to its value discipline.
Management’s bottom-up approach is primarilyoriented toward cheap stocks, but also includesmerger-arbitrage and distressed debt. Focusing onfundamentals helps them look past short-termdrops and buy more when they think a security hasbecome a bigger bargain. In mid-2015, the man-agers built a top-25 equity position in VolkswagenVOW3 because they thought its stock price didn’treflect the value of its Porsche and Audi busi-nesses. When Volkswagen’s shares subsequentlygot crushed following its emissions scandal, man-agement reassessed the company’s value, includ-ing the impact of potential fines and lost sales,and increased the number of shares the fund heldby roughly half.
The fund’s appetite for risk extends to downtrod-den sectors, too. While management remained rel-atively cautious in 2015 by maintaining a bench-mark equity weighting in hard-hit energy names,they found opportunities in financials stocks,which on average have the lowest trailing 12-month P/E and price/book ratios of any global sec-tor. Adding insurers like NN Group NN and sever-al European banks caused the fund’s financialsstake to climb to 27.8% of assets by year-end2015, which was 7.1 percentage points more thanthe MSCI World Index and ranked in the world-stock Morningstar Category’s top decile.
The fund’s nose for value and its mix of assetclasses have served it well in market downturns.Its recent showing, however, has been an excep-tion. Bad timing on the Volkswagen pick and lousyperformers in energy drove a 7.7% bottom-quart-ile loss during the past year through March 2016.The fund would have fared even worse had it notlargely hedged its foreign-currency exposure in atime period that was strong for the dollar.
The fund has disappointed of late but still has anedge over its typical rival since lead manager PeterLangerman began his second stint here at year-end 2009. He and his team are well schooled inthe fund’s proven multiasset approach and shouldkeep it competitive.
Process Pillar: ∞ PositiveThis fund’s integrated value approach receives aPositive Process Pillar rating. As with other Mutu-al Series offerings, it’s focused on cheap stocks,but also includes merger-arbitrage plays on an-nounced acquisitions and distressed debt. Whilethe managers pay attention to standard valuationmetrics like price multiples, they concentrate onfirms’ enterprise values as a function of what eachindividual business line is worth. Their activity inmerger-arbitrage helps them keep tabs on what in-formed buyers are willing to pay. Once they findcompanies whose securities are trading at a ma-terial discount to their estimates of intrinsic value,they look across the capital structure and investwhere they see the best risk/reward opportunities.Positions often migrate across that structure. Aninitial stake in a bankrupt firm’s senior, collateral-ized debt can lead to buying its junior, unsecureddebt as management becomes comfortable withits restructuring plan, or it may lead to an ex-change for equity following the reorganization.
The managers court risk by investing in troubledfirms, but their expertise, combined with an insist-ence on an appropriate margin of safety on price,provide some protection. They’re also willing towait years for theses to play out and readily go tocash if compelling alternatives are lacking. In addi-tion, they’re quick to sell once securities reachtheir estimates of fair value.
Management aims to layer downside protectioninto the structure of the portfolio. It holds a di-verse mix of roughly 130 equity and fixed-incomesecurities. Cheap stocks and merger-arbitrageequity positions typically take up 80%-90% of thefund’s assets, while the remainder is split largelybetween distressed debt and cash, as opportunitydictates. As of March 2016, the fund’s equity stakestood at 90%, with 4% of assets in distressed
Franklin Mutual Global Discovery Fund Class Z MDISX
Analysis
debt. Since bankruptcy plays, whether liquidationsor reorganizations, move according to the courts’timing, they can reward investors independent ofmarket movements. Yet they also come with theirown brand of uncertainty.
The fund can invest all of its assets overseas andup to 25% in emerging markets. Foreign exposurepeaked at 71% in 2007, 8% of which was in emer-ging markets (including South Korea and Taiwan).Since mid-2010, foreign exposure has generallytrended downward. At 42.6% currently, it falls be-low the 45% world-stock category median. Mostof the fund’s stocks are multinationals like top-10holding Royal Dutch Shell RDS.A. While the man-agers don't hedge the foreign-currency exposure ofholdings that do most of their business in U.S. dol-lars, like Shell, they do hedge the rest of their in-ternational currency exposure.
Cash was near 30% when the current team tookover in late 2009. It quickly came down and hassince ranged from roughly 5% to 15%.
Performance Pillar: ∞ PositiveBy building a portfolio composed of cheap stocks,merger-arbitrage plays, and distressed debt, man-agement aims to outperform on a risk-adjustedbasis. The fund receives a Positive PerformancePillar rating because it has met that aim. Sincelead manager Peter Langerman began his secondstint here at year-end 2009, the fund’s 7.3% annu-alized gain through March 2016 edges past thetypical world-stock category rival's 6.9%. Whilethe fund modestly lags the MSCI World Index dur-ing the same stretch, its Morningstar Risk-Adjus-ted Return is superior, thanks to volatility that isonly about four fifths that of the bogy.
The fund's outperformance owes to holding upbetter than most in market downturns, like 2011,while keeping the pace in rallies, like 2013. Thefund is not infallible, however. In 2015, its 3.4%loss placed in the category’s bottom third. Fallingcommodity prices were a headwind for the fund’senergy stocks. Building a top-25 position in Volk-swagen VOW3 by mid-year also hurt. Its shareprice subsequently got crushed because of an
emissions scandal.
Management's policy of generally hedging foreign-currency exposure can hurt the fund when the U.S.dollar is weak and help when it's strong. Thefund's 13.4% cumulative loss from July 2014through September 2015 could have been worse.Hedging helped during that roughly 18-month peri-od as the trade-weighted U.S. Dollar Index shot up23%.
People Pillar: ∞ PositiveThis fund’s Positive People Pillar rating reflectsmanagement’s expertise and shared experience.That experience, though, has been somewhat var-ied as all three managers left the firm at one pointbefore returning and two of three had prior stintshere. Lead manager Peter Langerman and coman-ager Philippe Brugere-Trelat both joined prede-cessor Heine Securities in the 1980s, whilecomanager Timothy Rankin joined the firm shortlyafter Franklin’s 1996 acquisition. Beginning withBrugere-Trelat’s departure prior to that acquisition,all three left the firm for periods ranging fromthree to 10 years but returned by mid-2010. Lan-german previously managed here from 1993 to1998 and returned in late December 2009, aroundwhen Brugere-Trelat also started. Rankin was acomanager here from July 2001 to late 2004 andreturned at year-end 2010.
The managers are part of Franklin’s Mutual Seriesteam. Tracing its lineage back to pioneering valueinvestor Max Heine and his protege Michael Price,the team comprises 15 portfolio managers and fiveanalysts, who have been with the firm or its prede-cessor for 10-plus years on average. They dividecoverage by global industry, region, and assetclass. Brugere-Trelat, for example, focuses onEuropean equities. He also leads Franklin MutualEuropean MEURX.
Langerman and Rankin each invest more than $1million in the fund, and Brugere-Trelat at least$500,000.
Parent Pillar: ∞ PositivePublic since 1971 and traded on the New YorkStock Exchange since 1986, Franklin Resources
BEN is the parent company of Franklin TempletonInvestments. Now a global asset manager with$866.5 billion in assets as of June 2015, the Cali-fornia-based firm has offices in more than 35countries. That its assets are almost evenly splitbetween fixed-income and equity strategies pointsto balance achieved through multiple acquisitionsover the years, including major purchases in the1990s of the Templeton and Mutual Serieslineups.
The firm’s "Ben Head" logo symbolizes what is inreality a diverse group of fund families. While theyshare back-office functions, the freedom to runtheir own strategies extends to hiring and training.This combination of support mixed with autonomyhas led to above-average manager retention andinvestment as well as solid long-term perform-ance, while keeping fees mostly in check. Creditgoes to the Johnson family, whose members haveled the firm since its 1947 founding, and an en-gaged board divided into three clusters.
To be sure, the firm’s strengths have the potentialto work against it. Steady leadership by the John-sons concentrates power in the hands of a few,while managers’ freedom can lead to risky bets inplaces like Ukraine and Puerto Rico. Overall, thefirm’s merits stand out, earning it a Positive Par-ent Pillar rating.
Price Pillar: ∞ PositiveCompetitive fees earn the fund a Positive Price Pil-lar rating. Its legacy, no-load Z shares, which holdmore than a third of the fund’s $22 billion assetbase, charged a 0.97% expense ratio in fiscal2015. That’s 5 basis points below the world-stockinstitutional peer median and placed in thatgroup’s second cheapest quintile. The newerbroker-sold A shares, which house most of thefund’s remaining assets, also sported a Below Av-erage Morningstar Fee Level. However, their mar-keting-oriented 12b-1 fees were 30 basis points,which is 5 basis points more than what’s typical.
Trading costs were modest. Brokerage fees of0.03% of average net assets in fiscal 2015 fell be-low the category norm of 0.16%.
The investment seeks to provide high total return from a portfolio of selected equity securities. Under normal circumstances, thefund invests at least 80% of its assets in equity securities of U.S. companies. "Assets" means net assets, plus the amount ofborrowings for investment purposes. In implementing its strategy, the fund primarily invests in common stocks of large- andmedium-capitalization U.S. companies but it may also invest up to 20% of its assets in common stocks of foreign companies,including depositary receipts.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,226 10,080 12,416 13,233 20,060 22,426Fund 2.26 0.80 24.16 9.79 14.94 8.41+/- S&P 500 TR USD 0.59 0.52 1.17 -0.25 0.48 1.39+/- Category 0.58 0.56 2.59 1.87 2.00 2.26% Rank in Cat 12 16 22 10 7 4# of Funds in Cat 1,521 1,504 1,412 1,256 1,107 816* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Last Price Day Chg % 52 Week Range
Y Microsoft Corp 2.99 62.33 BASE -0.57 [ 48.03 - 64.10
T Apple Inc 2.93 119.95 BASE 0.77 ] 89.47 - 119.96
Y UnitedHealth Group Inc 2.74 159.85 BASE -1.21 [ 107.51 - 164.00
T General Electric Co 2.27 31.41 BASE 0.18 ] 27.10 - 33.00
T Pfizer Inc 2.23 31.96 BASE -1.71 [ 28.25 - 37.39
% Assets in Top 5 Holdings 13.15
TIncrease YDecrease RNew to Portfolio
Top Sectors 11-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 20.30 22.27 20.12 18.43
y Financial Services 18.00 18.00 17.18 16.07
d Healthcare 14.33 16.02 14.33 14.29
t Consumer Cyclical 12.24 13.82 12.24 11.44
p Industrials 11.48 11.48 9.14 11.63
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
JPMorgan U.S. Equity is being placed under re-view as J. P. Morgan has announced that veteranmanager Tom Luddy will step back from managingthe fund in January 2018 and will be appointedvice chairman of J. P. Morgan Investment Man-agement. Scott Davis, who has been a namedcomanager on the fund since August 2014, willtake the lead here. Susan Bao, a comanager on thefund since 2001, will retain her role while assum-ing lead responsibility on the firm's Large Cap CorePlus (130/30) strategies.
The analysis that follows was published on July14, 2016.
JPMorgan U.S. Equity demonstrates that even aconstrained benchmark-aware strategy can beatits index when skillfully applied by an experiencedteam. This reliable core holding continues to merita Morningstar Analyst Rating of Silver.
The fund is designed to outperform incrementallywithout taking undue risk. Longtime managersTom Luddy and Susan Bao run half the fund's as-sets, drawing on the research of J.P. Morgan'sstrong core analyst team using the firm's propriet-ary dividend-discount model. Industry weightingsstay within close range of the S&P 500, and posi-tions in the 200-stock portfolio are rarely as muchas 2 percentage points off the benchmark weight-ings.
The end result has been low tracking error relativeto the S&P 500 and active share that has stayedclose to 50% during the past decade. That maysound like a recipe for mediocrity, but the fund hasconsistently outperformed thanks to solid stock-picking across the board. From January 2001through June 2016, its three-year rolling returnsbeat the S&P 500 70% of the time. Over the longterm, the fund's Morningstar Risk ratings, whichplace greater emphasis on downside volatility,have been in line with the large-blend Morning-star Category average. That's what the strategy is
designed to do: control risk, not minimize it.
Given the fund's carefully circumscribed strategyand long-tenured team with succession planningbuilt in, shareholders have reason to expect con-sistent performance going forward, particularlygiven its competitive expenses.
Process Pillar: — N/A
The benchmark-sensitive process aims to minim-ize sector and macroeconomic exposure relative tothe S&P 500. The fund can deviate from market in-dustry and stock weightings by 4 percentagepoints, but it generally stays within 2 points. Itshows considerable correlation with the S&P 500,with an R-squared of about 98% over the longterm. The portfolio is also diversified by name,with more than 150 holdings and about 20% of as-sets in the top 10. The strategy earns a Positiverating for Process because of what sets it apart:consistently strong stock-picking built on an in-house dividend-discount model and a strong coreanalyst team.
The core of the portfolio, 50% of assets, is run bylongtime managers Tom Luddy and Susan Bao.Scott Davis runs 20% of the portfolio using thesame strategy. All three rely on the research of thefirm's core analyst team. These industry analystsrank stocks within each industry based on estim-ated fair value; they use an in-house model incor-porating long-term earnings, cash flow, andgrowth-rate estimates. The managers incorporatethese rankings into their stock-picking, expressingmodest sector preferences based on their macroe-conomic view.
The remaining 30% of the portfolio is run directlyby the analysts. This portion is broadly sector-neutral relative to the S&P 500, though the ana-lysts may express industry preferences withinthose sectors.
In keeping with a philosophy that stock-pickingshould drive performance, sector weightings re-main fairly close to the S&P 500, with valuationdriving differences. The fund continues to have anunderweighting in overvalued consumer staples,
utilities, and REITs, with a small overweighting inanother more defensive sector, healthcare. Namessuch as UnitedHealth Group UNH are also part of a"cheap yield" theme comprising growth-at-a-reas-onable price names that have strong promise onthe upside. This play includes Alphabet GOOG,GOOGL. Within energy, instead of pricey bench-mark dominator Exxon Mobil XOM, the managersown Occidental Petroleum OXY for its better yieldand balance sheet and have smaller positions innames like Diamondback Energy FANG.
The fund continues a tilt toward consumer discre-tionary, with a preference for auto-related andtransportation stocks; top-10 holding Lowe's LOWis well-positioned for a continued housing recov-ery. They are also playing the cyclical recovery intechnology, particularly semiconductors, includingBroadcom AVGO, a big overweighting. (Picks aregenerally within 2 percentage points of the S&P500.) Apple AAPL is a larger position, but a relat-ive underweighting because of less-promisinggrowth. Anticipating interest-rate normalization,the managers added to financials in recent years,including high-quality bank Wells Fargo WFC.
Performance Pillar: — N/A
A carefully circumscribed strategy has led to con-sistently strong performance, earning the fund aPositive for the Performance Pillar. Outperform-ance is generally attributable to stock-pickingacross the board. From January 2001 (Susan Bao'sstart date as comanager) through June 2016, thefund's rolling three-year returns land in the tophalf of the category more than 80% of the timeand never in the bottom quartile. The fund's stand-ard deviation was 15.8, a bit higher than the S&P500's 14.9. Over the long term, the fund's Morning-star Risk ratings, which emphasize downsidevolatility, have been in line with the category aver-age, though they have been a bit higher in recentyears. The strategy is designed to control risk, notminimize it.
The fund's three-year rolling returns have beatenits S&P 500 benchmark 70% of the time. Since
January 2001, the fund's Institutional shares havereturned an annualized 5.8% through June 30,2016, versus 4% for the category and 5.2% for thethe S&P 500. While the fund has had some man-ager changes on the edges in recent years, it ranksin the top quartile of the category over the pastthree and five years. It lags its benchmark, though,after a rough one-year period, with financials andhealthcare picks (including former holding ValeantPharmaceuticals VRX) holding it back. Set againstits longer-term record, this is not cause for con-cern.
People Pillar: — N/A
An experienced team earns a Positive for thePeople Pillar. The core portfolio is run by TomLuddy and Susan Bao, who together manage anumber of JPMorgan's core large-cap U.S. equityvehicles; Luddy is the lead on this one. Luddyjoined the firm in 1976 and helped develop thestock-valuation model at the strategy's center. Baohas been with JPMorgan since 1997 and a coman-ager here since 2001. The two also run a 130/30fund, JPMorgan U.S. Large Cap Core Plus JLCAX,and Bao leads JPMorgan Tax Aware Equity JPDEX.
While Luddy has no plans to retire, successionplanning has begun. Scott Davis, who started atJPMorgan in 2006 and was a media and Internetanalyst on the team, took on the role of coman-ager in August 2014 and now runs about 20% ofassets using the same strategy. He will eventuallyassume Luddy's role as lead here.
Comanager Helge Skibeli, who joined the firm in1990, heads the U.S. core team of more than 25analysts (averaging about a decade of tenure withthe firm) that has run a sleeve of the fund sinceJuly 2009--currently, about 30% of assets. Skibelihas been named global head of research and willbe succeeded here by David Small, who is cur-rently associate director of U.S. research.
From July 2010 through mid-August 2014, up to20% of assets were split between large-capgrowth and large-cap value sleeves overseen byother managers.
Parent Pillar: ∞ PositiveJ.P. Morgan Asset Management is one of thelargest asset managers in the world, with nearly$2 trillion in assets. After healthy inflows in 2015,it continues to rank among the top 10 U.S. mutualfund companies. Its U.S. fund business boasts a di-verse lineup of more than 120 funds and ETFs sup-ported by a global investment team, and a distribu-tion effort centered on education has built advisortrust.
Many of the most popular funds are MorningstarMedalists, and a number are run by managers onthe job for a decade or more, including JonathanSimon of JPMorgan Mid Cap Value FLMVX andGiri Devulapally of JPMorgan Large Cap GrowthSEEGX. While Doug Swanson, longtime managerof the firm’s largest fund, JPMorgan Core BondWOBDX, began a leave of absence in 2015, veter-an Barb Miller stepped in, supported by the samestrong team. The SmartRetirement target-dateseries is another bright spot. The lineup earns anaverage of 3 stars but has been improving. Oneconcern has been whether the fast-growing JP-Morgan Strategic Income Opportunities JSOSXhas been adequately supported, though it has seenoutflows lately.
An experienced board of trustees has maintainedstrong oversight, and fees are competitive. Man-ager investment in the funds has increased signi-ficantly, and compensation now factors in 10-yearperformance where applicable, which exceeds in-dustry standards.
Price Pillar: ∞ PositiveThe fund easily earns a Positive Price rating. Mostof its assets are in Institutional, Retirement, or Se-lect shares. The Institutional shares, with a 0.62%expense ratio as of June 2015, have a Morning-star Fee Level of Below Average compared withother large-cap institutional shares. While the Se-lect shares' 0.77% expense ratio ranks as Aver-age compared with the same group, they are alsoavailable to retail investors through certain ad-visors. The Retirement shares are Below Averagewithin their peer group. The rest of the fund's
MFS Mid Cap Value FundClass R6 $20,852.99Mid-Cap Value $19,447.02S&P 500 TR USD $19,713.40
Investment Strategy
The investment seeks capital appreciation. The fund normally invests at least 80% of the fund's net assets in issuers with me-dium market capitalizations. The adviser generally defines medium market capitalization issuers as issuers with market capital-izations similar to those of issuers included in the Russell Midcap® Value Index over the last 13 months at the time of pur-chase. It normally invests the fund's assets primarily in equity securities.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,134 9,972 12,777 12,847 20,002 20,853Fund 1.34 -0.28 27.77 8.71 14.87 7.63+/- S&P 500 TR USD -0.33 -0.56 4.77 -1.32 0.42 0.60+/- Category -0.06 -0.07 -3.31 0.96 1.44 0.80% Rank in Cat 53 53 70 28 — —# of Funds in Cat 410 407 399 338 301 207* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Last Price Day Chg % 52 Week Range
T Fifth Third Bancorp 1.44 26.58 BASE -2.57 [ 13.84 - 27.88
T Allison Transmission Holdings Inc 1.33 33.91 BASE -0.24 [ 20.56 - 35.76
T The Hartford Financial Services GroupInc
1.23 48.43 BASE 0.19 ] 36.54 - 48.91
T Citizens Financial Group Inc 1.19 34.91 BASE -3.78 [ 18.04 - 37.08
T Discover Financial Services 1.13 70.75 BASE -1.27 [ 42.86 - 74.33
% Assets in Top 5 Holdings 6.33
TIncrease YDecrease RNew to Portfolio
Top Sectors 11-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 23.71 23.71 19.08 19.90
t Consumer Cyclical 12.99 15.02 11.58 13.69
p Industrials 12.13 12.13 10.29 14.11
d Healthcare 9.09 10.02 9.03 7.10
o Energy 7.99 7.99 6.63 9.16
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
The investment seeks growth of capital. The fund invests mainly in common stocks of small-capitalization companies, which itdefines as those with a total market value of no more than $2 billion at the time the fund first invests in them. It may continueto hold or add to a position in a stock after the company's market value has grown beyond $2 billion. The fund seeks to reducerisk by diversifying among many companies and industries.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,082 9,946 13,129 12,103 17,616 23,429Fund 0.82 -0.54 31.29 6.57 11.99 8.89+/- S&P 500 TR USD -0.85 -0.82 8.29 -3.46 -2.47 1.86+/- Category -1.58 -1.45 3.30 1.82 -0.25 1.68% Rank in Cat 89 90 25 29 57 10# of Funds in Cat 704 701 673 600 533 390* Currency is displayed in BASE
Top Holdings 09-30-2016Weight % Last Price Day Chg % 52 Week Range
Y West Pharmaceutical Services Inc 2.16 84.76 BASE -1.20 [ 53.88 - 88.30
Y Church & Dwight Co Inc 2.10 44.66 BASE 1.99 ] 38.42 - 53.68
Y Sensient Technologies Corp 2.02 77.93 BASE -0.26 [ 52.69 - 83.38
Y Icon PLC 1.97 80.93 BASE -1.34 [ 62.31 - 85.74
Y Tyler Technologies Inc 1.91 151.04 BASE -0.22 [ 118.16 - 175.77
% Assets in Top 5 Holdings 10.15
TIncrease YDecrease RNew to Portfolio
Top Sectors 09-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
p Industrials 21.72 22.61 20.69 16.93
a Technology 18.63 18.97 17.45 24.99
d Healthcare 16.18 16.76 13.54 17.70
t Consumer Cyclical 15.03 16.18 15.03 13.96
y Financial Services 12.88 12.88 10.74 9.15
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
strong long-term track record.By David Kathman, CFA 12/8/2016
Neuberger Berman Genesis has one of the longest,most consistent track records of any small- or mid-cap fund, helping earn it a Morningstar AnalystRating of Bronze. A seasoned management teamled by Judy Vale and Bob D'Alelio has run the fundfor the past 20 years, using a strategy that's verymuch focused on the long term. They look forsmall-cap stocks that dominate a competitiveniche and feature solid balance sheets and freecash flows, in addition to reasonable valuations.They tend to hold on to stocks that they like aslong as the thesis remains intact, so turnover islow (under 20% a year) and some favorite stocks,such as top-10 holdings Church & Dwight CHD andAptarGroup ATR, have been in the portfolio formore than a decade.
Although the managers consider themselvessmall-cap value investors, their tendency to stickwith their winners means that quite a few hold-ings have grown into mid-caps, and the portfoliohas long leaned toward the growth area of theMorningstar Style Box. As a result, the fund hasalways been tough to categorize. It was in thesmall-blend Morningstar Category for years be-fore moving to mid-cap growth in 2011, and in2015 it moved to its current home in the small-growth category.
The good thing for investors is that the fund'slong-term returns look great no matter what it'scompared with. Through Nov. 30, 2016, its 10-, 15-, and 20-year returns all rank in or near the small-growth category's top decile and would look simil-arly strong relative to the mid-cap growth andsmall-blend peer groups. They have also easilybeaten the fund's benchmark, the Russell 2000 In-dex, and the Russell 2500, a small/mid-cap index.In the short term, the fund's relative returns havetended to rank near the top or the bottom of itspeer group, mainly because it's one of the leastvolatile small-cap funds; its peers have much moredramatic ups and downs in absolute terms.
The fund's $11 billion asset base makes it one ofthe largest funds in the small-growth category.That's concerning enough to keep it from a higherAnalyst Rating, even though the managers havedone a good job of handling that asset base.
Process Pillar: ∞ PositiveAs with most Neuberger Berman stock funds, thisfund's managers pay little attention to bench-marks, picking stocks through a bottom-up pro-cess that's informed by long-term macroeconomictrends. They focus on small companies that gener-ate good free cash flows by dominating a compet-itive niche, generally preferring firms that aren'ttoo cyclical and can grow over the next three tofive years regardless of the broader economy. Al-though they do use some screens to identify prom-ising small-cap stocks, they evaluate companiesprimarily through hands-on research, includingone-on-one meetings with management and fol-low-up phone calls. Wall Street research plays aminor role, mainly in determining the consensusview on a company.
Management takes a long-term, patient perspect-ive, often holding on to stocks for years; thus, theportfolio's annual turnover is low, usually around20%. The managers will buy only stocks with mar-ket caps under $1.5 billion, but the low turnovermeans that holdings often grow into mid-caps, sothe fund historically has tended to straddle the linebetween small- and mid-cap territory.
Although the team members consider themselvesvalue managers and try to keep the portfolio'sprice/earnings ratio below that of the Russell 2000Index, in practice they're willing to pay up a bit forattractive stocks in growing industries, so the fundhas had a growth tilt.
The managers keep this fund diversified and closeto fully invested; cash seldom exceeds 5% of as-sets and no holding takes up more than 3%. Theydon't worry too much about benchmarks, so sectorweightings often differ from those of categorypeers or the Russell 2000 Index, but they try not tolet any sector get too big.
The fund is still heavy in defensive steady-Eddiessuch as Church & Dwight and packaging makerAptarGroup (two of the top six holdings as of Sept.30, 2016). It also holds some more-cyclical names,provided they meet the necessary quality criteria.The portfolio's technology weighting has in-creased in the three years since Gregory Spiegeljoined the team (specifically to cover tech), thoughit still has a modest underweighting in the sectorrelative to its small-growth peers.
The fund has an overweighting in financials relat-ive to its peers but an underweighting relative tothe Russell 2000. Conversely, it is slightly under-weight in healthcare relative to the category, butoverweight relative to the Russell 2000. Withinhealthcare, it owns much less pharma and biotechthan the benchmark, which helped it in 2016,when those industries suffered losses.
The managers have been paying more attention todividend yield lately, so that about three fourths ofthe fund's holdings paid a dividend. However, theyavoid real estate investment trusts, which havetoo much leverage for their liking.
Performance Pillar: ∞ PositiveThis fund has been an outstanding long-term per-former. As of December 2016, its 15- and 20-yearreturns rank in the top decile of the small-growthcategory, and they look similarly strong relative tomid-cap growth, where it was from 2011 to 2015,and small blend, where it was until 2011. Its 10-year returns rank in the top one third of all threecategories.
At first glance, the fund's annual returns look likethey've been all over the map, with top-decilerankings in some years (2002, 2005, 2007) and bot-tom-decile rankings in others (2003, 2006, 2014).However, that pattern says more about the volatil-ity of the market during the past decade than itdoes about this fund, which actually has been oneof the least volatile small- or mid-cap offeringsaround. It has a Morningstar Risk rating of Lowover the trailing 10-year period, and its standarddeviation (a measure of volatility) is among the
lowest in the small-growth, mid-growth, or small-blend categories.
The fund tends to hold up well in down marketssuch as 2008 and 2011, thanks to the managers'emphasis on relatively stable cash generatorswithout a lot of debt, but for the same reasons ithas a tough time keeping up in speculation-drivenbull markets such as those of 2009 and 2010. Itbadly underperformed peers in 2014, when low-quality, debt-heavy stocks performed best, but re-bounded nicely in 2015 and the first 11 months of2016 with top-quartile returns.
People Pillar: ∞ PositiveThe managers here are an experienced lot. JudyVale became a manager of the fund in February1994, and Bob D'Alelio was named a manager inAugust 1997. Both have more than 30 years of in-vestment experience, and they've done a fine jobof overseeing the fund's management team formore than a decade. Brett Reiner was namedcomanager in December 2005 after having been ananalyst on the fund since 2003; Michael Bowyer,who was named a comanager at the same time asReiner, retired in 2016 after 15 years with thefund. Gregory Spiegel was named comanager inMarch 2015 after three years as a technology ana-lyst on the fund.
The team also includes four dedicated analysts:Solin Cho, who joined the fund in 2012 and hasbeen with Neuberger since 2006; Abhishek Rath-od and James Graeber, who joined the fund in2014; and Vinayak Kakodkar, who joined in 2016.Cho and Rathod were previously analysts else-where in Neuberger. Each member of the teamcovers specific sectors except Vale and D'Alelio,who are generalists.
As of Aug. 31, 2016, Vale, D'Alelio, and Reinereach had more than $1 million invested in thefund, and Spiegel had $500,000 to $1 million in-vested.
Parent Pillar: ∞ PositiveUnlike fund shops that tightly control risk, result-ing in a lineup of bland index-huggers, NeubergerBerman lets its managers invest with conviction.
Neuberger funds tend to be concentrated, with rel-atively low turnover and significant sector bets.That leads to more-volatile returns, but the fundshave mostly performed quite well over time, withfew duds and several standouts.
This culture faced a threat in 2008 when then-par-ent Lehman Brothers collapsed, but a group ofNeuberger insiders eventually took the firmprivate. It's now owned by about 300 employees,including most portfolio managers and many ana-lysts, providing good incentives for them to stickaround. Neuberger is focused solely on invest-ment management, though its retail mutual fundsonly make up a fraction of assets under manage-ment (about 15% as of late 2015). Since 2008, itgradually has been shifting its distribution em-phasis to advisor-sold share classes with salescharges, though existing shareholders can still buyno-load shares.
Neuberger has made a handful of acquisitions dur-ing the past decade and launched a flurry of newfunds in recent years, including some trendy onessuch as absolute return, long-short, and Chinafunds. Such moves are potential causes for con-cern that bear watching, but at heart, Neubergerremains a boutique with a nicely distinctive invest-ing culture.
Price Pillar: ∞ PositiveAbout one third of this fund's assets are in the In-stitutional shares, whose 0.85% expense ratio isin the cheapest 20% of institutional shares of do-mestic small-cap funds; an agreement with the ad-visor will prevent it from rising above that level un-til 2021. Most of the remaining assets are splitbetween the Investor, R6, and Trust shares, whoseexpenses are in the second-cheapest quintile oftheir peer groups. Overall, this fund's expenses arequite reasonable.
Neuberger Berman HighIncome Bond FundInstitutional Class$20,288.66High Yield Bond $17,204.54BBgBarc US Agg Bond TRUSD $15,362.59
Investment Strategy
The investment seeks high total return consistent with capital preservation. To pursue its goal, the fund normally invests mainlyin a diversified portfolio of U.S. dollar-denominated, High-Yield Bonds, with an emphasis on debt securities rated below invest-ment grade (commonly called "junk bonds"). The adviser normally expects to have a weighted average maturity between fiveand ten years.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,104 10,120 11,658 11,070 13,618 20,289Fund 1.04 1.20 16.58 3.45 6.37 7.33+/- BBgBarc US Agg BondTR USD
0.67 0.36 14.49 0.60 4.15 2.94
+/- Category 0.05 -0.08 0.81 0.08 0.25 1.36% Rank in Cat 46 60 42 51 43 —# of Funds in Cat 742 741 706 601 478 319* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Maturity Date Amount Mil Value Mil
Western Digital 144A 10.5% 0.97 04-01-2024 34.21 39.60
T Sallie Mae 4.875% 0.97 06-17-2019 38.53 39.59Vrx Escrow 144A 5.875% 0.95 05-15-2023 52.40 38.74
Y Arcelormittal Sa Luxembourg 7% 0.90 10-15-2039 34.72 36.71Sprint Nextel 6% 0.87 11-15-2022 36.73 35.44
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Neuberger Berman High Income Bond's Morning-star Analyst Rating of Silver is based on the stabil-ity of its management team and thorough, repeat-able process.
The fund's team-based approach helps to minim-ize disruptions and provide management continu-ity. The benefits of this structure were evident re-cently as Tom O'Reilly took over leadership re-sponsibilities following the late-2015 retirement oflongtime lead manager Ann Benjamin. O'Reilly andBenjamin had worked together for more than twodecades, and O’Reilly has served as a portfoliomanager on the fund since 2005. Given his deepinvolvement in managing this fund during the pastseveral years, investors should expect a seamlesstransition. Three other comanagers run this fundalongside O'Reilly, and they are supported by ateam of 27 credit analysts.
A well-structured process also supports the fund'sappeal. The fund's analysts use a thorough "creditchecklist" that focuses on cash flow generation,repayment capabilities, management quality, andvaluation, along with other factors to analyze is-suers and individual bonds. The team will oftensearch for mispriced bonds that are likely to exper-ience an upgrade, and it avoids bonds with poorfundamentals that may default. Accordingly, theportfolio is typically dominated by B and BB ratedbonds, but will include both BBB and CCC bondswhen the team views relative valuations as at-tractive.
Over time, this process has yielded admirable re-turns. Since O'Reilly and Benjamin took over thefund in October 2005, its 6.5% annualized returnthrough February 2016 is better than 90% of peersin the high-yield bond Morningstar Category. Thefund did run into a rough patch in 2015, thanks toan overweighting in high-yield energy bonds enter-ing the year. However, the team changed its viewson oil prices and ended the year underweight the
struggling sector. While this positioning detractedfrom returns--the fund's 7.6% loss for the 12months ended February 2016 ranks near themiddle of the peer group--the team deserves cred-it for not anchoring on its views and adjusting itspositioning when its thesis changed.
Process Pillar: ∞ PositiveThis fund earns a Positive Process Pillar rating be-cause it employs a thorough and repeatable pro-cess with a bias toward the higher-quality por-tions of the high-yield market. The fund's portfoliomanagers and analyst team use fundamental re-search and relative valuations to find potential up-grade candidates and avoid credits with decliningfundamentals in order to minimize the likelihood ofdefaults. As a result, holdings are biased toward Band BB rated bonds but will occasionally veer to-ward both BBB and CCC bonds if relative valu-ations look attractive. Up to 20% of the fund canbe invested in bank loans, which helps limit in-terest-rate risk. This is a diversified fund, and itwill generally maintain exposure to anywherebetween 100 and 150 different issuers. Portfoliomanagers will also rotate across industries basedon valuation and fundamentals.
Analysts use a thorough credit checklist to guidetheir analysis and ensure consistency across dif-ferent holdings. Security selection begins byscreening out illiquid bonds as well as low-qualitynames that the team views as susceptible todowngrades. The credit checklist requires a focuson cash flows, repayment options, and valuations,including a scenario analysis to project upside anddownside cases. Analysts assign a proprietarycredit rating to each bond and then compare itsvaluation with other bonds in similar industries orof similar credit quality.
The most notable change in the portfolio was itsexposure to the struggling energy sector. The port-folio started 2015 with a roughly 18% position inenergy versus 14% for its benchmark, the BofA
Neuberger Berman High Income Bond Fund Institutional Class NHILX
Analysis
Merrill Lynch U.S. High Yield Master II Con-strained Index, but ended 2015 underweight thesector at 8.4% while the benchmark was at10.9%. Some of the reduction came from marketdeclines, but the team also sold out of severalnames in mid-2015 after it reconsidered its viewthat oil prices would rise and shifted to a "lowerfor longer" view. Other notable sector bets in-cluded an overweighting to healthcare issuers,which made up 12.7% of the portfolio versus10.1% of the benchmark. Gaming-related firmsalso make up a large portion of the portfolio, ataround 9.4% of total assets versus 4.3% for thebenchmark.
On a credit-quality basis, the team has shifted thefund to a higher-quality stance during the pastyear. The fund's stake in BB rated bonds was inline with the fund's benchmark at around 49% ofassets as of Dec 31, 2015, up from 38% last year,while single B names dropped from 38% last yearto 31%. CCC rated bonds dropped to 9.8% of totalassets at the end of 2015, compared with 12.9%for the benchmark and almost 20.0% of total as-sets last year. The team also added to its bank-loan position, which made up 7.4% of total assetsat the end of 2015.
Performance Pillar: ∞ PositiveThis fund’s admirable long-term returns are thebasis for its Positive Performance Pillar rating.Since Tom O'Reilly and Ann Benjamin took overmanagement of the portfolio in October 2005through February 2016, the fund ranked ahead of90% of the high-yield bond category, and its 6.5%annualized return during that time easily beat the5.4% average return for the category. The fund'svolatility-adjusted returns since October 2005were similarly strong, as its Sharpe ratio of 0.6was well ahead of the category average of 0.4.The team achieved these results via deft naviga-tion through a variety of market environments. Forexample, the team shifted to a defensive stance in2008, and though the fund suffered hefty lossesthat year, it still performed better than 90% of itscategory peers.
The fund did run into a rough patch in 2015. Forthe past year through February 2016, the fund's7.6% decline landed right near the middle of thehigh-yield bond category. The primary detractorwas the team's overweight exposure to the en-ergy sector during the first half of 2015. The teameventually changed its view on the energy sectorand lightened up on the space, which helped insu-late the portfolio from heavier losses in the secondhalf of the year.
People Pillar: ∞ PositiveThe fund is managed with a team-based approach,which helps to minimize disruptions and providemanagement continuity without dramatic changesto process. This is the primary reason for thefund's Positive People Pillar rating. The benefits ofthe fund's management structure were evident fol-lowing the late-2015 retirement of longtime leadmanager Ann Benjamin. Benjamin had led theteam that oversees this fund since she joinedNeuberger Berman in 1997. Comanager Tom O'Re-illy, who also worked with Benjamin for more thantwo decades, took over Benjamin's responsibilit-ies following her retirement. Given O'Reilly's deepinvolvement in managing this fund during the pastseveral years, investors should expect a seamlesstransition.
Further reinforcing the fund's team-based ap-proach, O’Reilly is joined by comanagers Russ Cov-ode and Dan Doyle, both experienced investors.Patrick Flynn, a manager in Neuberger Berman'sdistressed-debt group, joined this fund at the startof 2016 following Benjamin's retirement. Theseportfolio managers are supported by a deep teamof 27 credit and portfolio analysts and five tradersand one risk management specialist. In total, thebelow-investment-grade team now overseen byO'Reilly manages $36.8 billion in assets acrosshigh-yield bonds and bank loans. Manager owner-ship of this fund is also strong, as O'Reilly hasmore than $1 million invested here, and Covodehas between $100,000 and $500,000.
Parent Pillar: ∞ PositiveUnlike fund shops that tightly control risk, result-ing in a lineup of bland index-huggers, NeubergerBerman lets its managers invest with conviction.Neuberger funds tend to be concentrated, with rel-atively low turnover and significant sector bets.That leads to more-volatile returns, but the fundshave mostly performed quite well over time, withfew duds and several standouts.
This culture faced a threat in 2008 when then-par-ent Lehman Brothers collapsed, but a group ofNeuberger insiders eventually took the firmprivate. It's now owned by about 300 employees,including most portfolio managers and many ana-lysts, providing good incentives for them to stickaround. Neuberger is focused solely on invest-ment management, though its retail mutual fundsonly make up a fraction of assets under manage-ment (about 15% as of late 2015). Since 2008, itgradually has been shifting its distribution em-phasis to advisor-sold share classes with salescharges, though existing shareholders can still buyno-load shares.
Neuberger has made a handful of acquisitions dur-ing the past decade and launched a flurry of newfunds in recent years, including some trendy onessuch as absolute return, long-short, and Chinafunds. Such moves are potential causes for con-cern that bear watching, but at heart, Neubergerremains a boutique with a nicely distinctive invest-ing culture.
Price Pillar: ∞ PositiveThe fund earns a Positive Price Pillar rating be-cause the majority of assets are held in shareclasses that earn a Morningstar Fee Level of Be-low Average. The fund's institutional share classholds 73% of assets and charges an expense ratioof 0.69% compared with 0.75% for the median ofsimilarly distributed high-yield bond funds. Thefund's retirement share class, NRHIX, holds anoth-er 19% of assets and charges a 0.61% expense ra-tio, which is similarly below the 0.69% charge forthe median retirement share class in the high-yieldbond category.
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
remains an excellent holding.By Greg Carlson 1/12/2017
Oakmark International lost a veteran comanager,but its prospects remain strong. It continues toearn a Morningstar Analyst Rating of Gold.
At the end of September 2016, Rob Taylor, coman-ager of this fund since the end of 2008, retired.Taylor's departure certainly represented a loss. A22-year veteran of the firm, he had served as dir-ector of international research from 2004-15 andcomanaged Gold-rated Oakmark Global OAKGXsince 2005.
But this fund will remain in highly proven hands.Lead manager David Herro has amassed a superbrecord in his 24-year tenure. He has twice previ-ously run the fund on his own for periods ofroughly three years (1992-95 and 2005-08) with nodrop-off in performance. He also named a newcomanager here in November--Mike Manelli, hiscomanager on Bronze-rated Oakmark InternationalSmall Cap OAKEX since 2011. The two are backedby six other analysts and portfolio managers withan average of 8.3 years' tenure at the firm. Threeof them were recently named comanagers onHerro's other charges: Justin Hance on OakmarkInternational Small Cap, Jason Long on OakmarkGlobal, and Eric Liu on Oakmark Global SelectOAKWX (which Herro has managed with BillNygren).
Although Herro runs more than $30 billion in thisstrategy, the reopening of the fund to all new in-vestors in July 2016 isn't a concern. Investmentlosses and redemptions due to poor recent per-formance pulled that number down from a peak ofover $40 billion. Herro says he hoped to match re-cent outflows with inflows, which makes it easierto buy and sell stocks at desired times. Thestrategy remains focused on large caps.
The fund's financials holdings, which make up asizable chunk of assets, have largely underper-formed (even in 2016, when the fund did well over-
all). But Herro argues that the fund's Europeanbank stocks in particular are too cheap given theirimproved balance sheets and potential for earn-ings growth. The fund remains a solid holding.
Process Pillar: ∞ PositiveLike all Oakmark stock-pickers, lead manager Dav-id Herro and team seek companies trading at deepdiscounts to their assessment of their intrinsicvalue. The estimate of a business' worth is basedon multiple valuation models and, depending onthe company under consideration, may focus on afirm's likely private-market acquisition price, itstangible book value, or normalized discounted cashflows.
That's not unusual, but the degree to which Oak-mark focuses on absolute, not relative, value setsthe shop and this team apart. Firms that appear at-tractively valued compared with industry peers willonly garner attention if they also seem cheap rel-ative to their own stringently vetted prospects.
Herro also favors companies with shareholder-aligned managements, as evidenced by (amongother things) their own investment in the firm andtheir capital-allocation skill. Stock-repurchase pro-grams, dividend hikes, and sensible acquisitionsthat are accretive to earnings are generally re-garded favorably, but as with all aspects of the en-tirely bottom-up process, judgments are madestrictly on a case-by-case basis. Herro aims forlong holding periods, but volatility can force hishand. Portfolio turnover typically ranges from 30%to 50% annually. This distinctive approach earns aPositive rating for Process.
As usual, this fund looks significantly differentfrom its typical peer and its benchmark. At theclose of September 2016, the fund's combined72% stake in the United Kingdom and the rest ofdeveloped Europe was well above the 57% stakeof the MSCI World ex USA Index and the fund'stypical foreign large-blend peer. The fund's heftystake in European financial-services firms such asCredit Suisse of Switzerland, BNP Paribas ofFrance, and Intesa Sanpaolo of Italy drove thatweighting.
Indeed, financials along with consumer cyclicalcompanies were the fund's largest sector expos-ures, soaking up a combined 61% of assets at theend of the third quarter. With industrial stocks ac-counting for an additional 19% of assets, the fundtilts toward cyclicals, although (as usual) it has noexposure to energy--which served the fund well in2015. Healthcare, typically a more defensive areaof the market, is virtually absent from the portfolio,while it garners an 10% weighting in the bench-mark MSCI World ex USA Index and in its typicalforeign large-blend rival.
David Herro managed close to $35 billion in late2016, down from a peak of over $40 billion. Thefund reopened to all new investors in July and hasalways had a large-cap focus, but it would betough to take hefty positions in firms at the lowend of the fund's capitalization range ($5 billion).
Performance Pillar: ∞ PositiveBetween the fund's October 1992 inception andDec. 31, 2016, it delivered an annualized return of9.7%, 4.0 percentage points better than the gainof its benchmark, the MSCI World ex USA Index.The fund's margin of victory versus the typical for-eign-large blend fund was almost as large. It's per-formed consistently well, too. In the time frame'srolling five-year periods, the fund bested thoseyardsticks 85% of the time.
Versus its benchmark, the fund has garnered mostof its outperformance during downturns while hov-ering near the norm in rallies. Meanwhile, the fundhas offered the best of both worlds versus typicalpeers, losing 92% as much in down markets whilealso gaining 11% more in upturns. True, the fundhas been more volatile; its overall MorningstarRisk rating is High. However, the fund's Sortino ra-tio, a measure of risk-adjusted return, is far higherthan the benchmark's and typical peer's figures.Thus, its Performance rating is Positive.
That said, the fund recently went through a toughstretch--it trailed more than 90% of peers over thepast one and three years through July 2016. Thepoor showing owed in part to a big stake in finan-
cials that hurt badly. Positions in automakersDaimler, Honda, and Toyota were also detractors.A late-year rebound improved its numbers, buteven in July the fund had beaten more than 90%of peers and its benchmark over the trailing five,10, and 15 years.
People Pillar: ∞ PositiveAt the end of September 2016, Rob Taylor, acomanager here since 2008, retired. David Herro,lead manager of the fund since its 1992 inception,remains at the helm. Taylor's departure was cer-tainly a loss. He was a 22-year firm veteran, hadcomanaged Gold-rated Oakmark Global since2005, and served as the head of international re-search from 2004-15.
However, don't expect a drop-off here. Herro hasgenerated a stellar record in his 24-year tenure,has steered Bronze-rated Oakmark InternationalSmall Cap since its 1995 inception, and hascomanaged Silver-rated Oakmark Global Selectwith veteran Bill Nygren since its 2006 launch.Herro also took over Taylor's spot at OakmarkGlobal, managing the fund's non-U.S. portion.
In November, Herro made several promotions:Mike Manelli, comanager of Oakmark Internation-al Small Cap since 2011, was named comanager ofthis fund, too. Also, Justin Hance, Jason Long, andEric Liu became comanagers on InternationalSmall Cap, Global, and Global Select, respectively.(The trio joined the firm in 2010, 2011, and 2009,respectively.) Although Herro is 55 and has noplans to retire, he wanted to give team membersmore responsibility as part of succession planning.
Herro's support team also includes three analystswith an average of nine years' tenure at Harris and11 years of total investment experience. This ex-perienced crew earns a Positive for People.
Parent Pillar: ∞ PositiveHarris Associates boasts an admirable investing-centric culture. New fund launches, for example,aren't driven by marketing trends but by moneymanagers with decades of experience and out-standing long-term track records. Indeed, Oakmarkhas launched only one new fund in the past 16
years.
With 17 portfolio managers (nine of whom alsoserve as analysts) and 10 dedicated investmentanalysts, Harris is well-staffed with investmentprofessionals. Analysts at the firm are divided intointernational and domestic teams and, in collabor-ation with managers, maintain the list of ap-proved stocks from which all Oakmark managerschoose for their portfolios.
Overall, Harris is an impressive parent, but its fundlineup should cost less. Assets in the funds rosefrom roughly $21.5 billion in December 2008 tomore than $84 billion in July 2015. (Harris man-ages $135 billion overall.) While fund fees havedeclined during the period, the amounts haven'tbeen commensurate with asset growth.
That shortcoming aside, Oakmark investors havebeen well served over the long haul by managerswho also are significant investors in their funds.With just two exceptions (each appointed twoyears ago), all Oakmark managers invest morethan $1 million in their charges. The firm's leadingmanagers are aging, but the firm appears well-pre-pared for their eventual departures.
Price Pillar: ¶ NeutralAt 1.00% as of the most recent annual report(September 2016), the fund's price tag is a bitlower than the median price tag in the fund's fee-level comparison group of foreign large-cap no-load funds (1.04%) and earns a Morningstar FeeLevel of Average. However, that expense ratio was5 basis points lower a year ago when the fund waslarger.
Judged by asset size, the fund doesn't look like abargain. At $26 billion, it ranks among the Morn-ingstar Category's largest offerings. The fundcould stand to share more of its economies ofscale with fundholders. It earns a Price rating ofNeutral.
Oppenheimer DevelopingMarkets Fund Class Y$16,400.16Diversified Emerging Mkts$11,895.34MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks capital appreciation. The fund mainly invests in common stocks of issuers in developing and emergingmarkets throughout the world and at times it may invest up to 100% of its total assets in foreign securities. Under normal mar-ket conditions, it will invest at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of is-suers whose principal activities are in a developing market, i.e. are in a developing market or are economically tied to a devel-oping market country. The fund will invest in at least three developing markets.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,307 10,157 12,169 9,344 11,667 16,400Fund 3.07 1.57 21.69 -2.24 3.13 5.07+/- MSCI ACWI Ex USA NRUSD
0.75 -1.64 3.80 -1.42 -2.06 3.83
+/- Category -0.60 -0.45 -0.70 -0.99 1.48 3.15% Rank in Cat 69 70 55 74 21 1# of Funds in Cat 887 868 811 603 424 173* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Last Price Day Chg % 52 Week Range
Alibaba Group Holding Ltd ADR 4.65 95.98 BASE -0.31 [ 59.25 - 109.87Housing Development Finance CorpLtd
4.48 — BASE -0.88 [ 1,011.45 - 1,464.00
Y Tencent Holdings Ltd 4.25 197.70 BASE 0.51 ] 132.10 - 220.80Taiwan Semiconductor ManufacturingCo Ltd
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
This fund's well-established process, reasonablefees, and strong long-term performance instill con-fidence, making it a solid choice for emerging-mar-kets exposure. The fund earns a Morningstar Ana-lyst Rating of Silver.
Lead portfolio manager Justin Leverenz focuses onfirms he thinks will benefit from trends such as agrowing middle class, new technology, restructur-ing, and aging. The portfolio tilts toward con-sumer companies and large-cap growth names.Developed-markets names, which typically ac-count for about 20% of the portfolio, includeEuropean names Prada PRDSF and LVMH LVMHF,and Hong Kong companies AIA Group AAIGF andHong Kong Exchanges and Clearing 00388.
What the fund doesn’t own is just as important aswhat it does. Leverenz is benchmark-agnostic. TheMSCI Emerging Markets Index includes manyquasi-government-controlled large-cap companies,which often put political goals ahead of sharehold-er interests, making them unattractive long-terminvestments. The index has loads of cyclical, capit-al-intensive names, areas he tends to avoid. In-stead, he prefers firms with good returns on inves-ted capital and stable cash flows.
Performance has lagged recently, as strength inthe emerging markets came from commodity-ori-ented countries such as Brazil, Russia, and SouthAfrica, areas that had been very weak for yearsprior to 2016. The cyclical names from these coun-tries are areas of the market Leverenz typicallyavoids. Because this portfolio is quite differentfrom that of its benchmark, it can exhibit highertracking error.
It has managed to stay ahead of the pack in a vari-ety of market conditions since he took the reins inMay 2007. From his start date through August2016, its rolling 36-month performance has landedin the top quartile of the diversified emerging-mar-kets Morningstar Category 77% of the time and in
the top half 96% of the time.
At $30 billion, this is the largest U.S.-listed, act-ively managed emerging-markets fund. It is closedto new investors. Asset growth (in vehicles distrib-uted around the world) bears monitoring, givenemerging markets' lower levels of liquidity.
Process Pillar: ∞ PositiveThe team has employed a thoughtful, bottom-upapproach that earns the fund a Positive Processrating.
It aims to buy firms with competitive advantagesand healthy free cash flows that can generate highreturns on capital throughout a market cycle. Of-ten these stocks fit an investment theme--for ex-posure to a growing middle class, the portfolio hasheld banks with a strong consumer finance busi-ness, hardware firms that are supplying compon-ents for next-generation consumer electronics, andChinese Internet companies with a dominant re-tail platform. Given the long-term nature of thesethemes, the fund tends to hold names for years. Asa result, annual turnover has averaged 20%-30%,well below the category norm.
Entry price and valuations are key parts of thestrategy, and Leverenz strives to keep his teamready to get into names when the opportunityarises. In 2016's first quarter, the team initiated aposition in clothing retailer Fast Retailing FRCOF(owner of Uniqlo), which Leverenz believes has alarge opportunity in China and Southeast Asia. Atthe time of the purchase, the stock had been downalmost 40% because of pricing missteps in its Ja-pan operations. But, typically, buying opportunit-ies tend to arise as a result of a macro event, not acompany-specific event.
Like most international-equity funds, this funddoes not hedge its foreign-currency exposure.
While the fund's focus on growth names has re-mained consistent, the portfolio's attributes haveshifted slightly. Over the past year, Leverenz haspruned smaller holdings and smaller companies,and, as a result, the fund's average market cap has
trended higher. This shift may allow for greater ca-pacity for the fund but may also limit the fund's in-vestment universe, particularly for a growth-ori-ented fund. We will be monitoring this fund's port-folio shift and asset growth in the coming months.
Historically, the fund has held between 100 and125 names, but it now holds about 90 companies.Of note, the top 10 holdings have grown more con-centrated and currently account for about 35% ofthe portfolio. Leverenz said he plans to opportun-istically shift allocations to achieve more equalweighting, especially across the top half of namesin the portfolio, in the coming years.
The fund holds a healthy dose of pricey names andcurrently has a trailing 12-month price/earnings ra-tio of 24 times, significantly above the MSCI Emer-ging Markets Index’s 14 times and the categoryaverage's 14 times. Leverenz is content to hold onto some fast-growing stocks when he continues tosee strong long-term potential, like Chinese Inter-net firm Tencent TCTZF and Mexican consumername Femsa, both of which recently traded at 40-50 times earnings.
Performance Pillar: ∞ PositiveThe fund tends to outshine its peers in challen-ging market conditions, and it hasn't sat out dur-ing market rallies. It earns a Positive Performancerating.
Good stock-picking, rather than being in the rightcountries at the right time, has kept the fund ingood shape through a full market cycle. For ex-ample, from 2011 through 2015, the cumulative re-turn for the MSCI China Index was 8%, whereasthis fund's China holdings returned 51%. Similarly,the MSCI India Index, over the same time period,returned negative 9%, whereas this fund's Indiaholdings returned 34%.
Valuation is also a key driver of long-term perform-ance. In 2007, Leverenz had an underweighting inthe largest, most liquid Chinese stocks becausethey were expensive, and those names were
among the hardest-hit during the 2008 financialcrisis. This portfolio positioning helped the fundoutperform the category average return by morethan 500 basis points in 2008, and it has sincecontributed to the fund's long-term outperform-ance relative to peers.
The overall results are impressive. Since Leverenztook over in May 2007, the fund's 46% cumulativegain through August 2016 landed well ahead ofthe category average return of 5% and the MSCIEmerging Markets Index's return of 15%. His re-cord looks even better when accounting for risk, asdownside protection has made for a less-volatileexperience overall.
People Pillar: ∞ PositiveLead manager Justin Leverenz has done a solid jobsteering this fund so far, and he invests more than$1 million alongside fundholders. The fund earns aPositive People rating.
Leverenz has over 20 years of investment experi-ence, has lived and worked in the Greater Chinaregion for over a decade, and is fluent in Chinese.He joined Oppenheimer's international equity teamin July 2004 as an analyst for Rajeev Bhaman onOppenheimer Global OPPAX. He took over as port-folio manager of Oppenheimer Developing Mar-kets in May 2007. He is also the director of emer-ging-markets equities, where he leads a team ofseven professionals. He and five others work onOppenheimer Developing Markets, and the othertwo focus on small- and mid-cap OppenheimerEmerging Markets Innovators EMIAX, whichlaunched in 2014. The entire team works togetherin New York to share research and ideas.
In September 2015, Leverenz's second-in-com-mand, John Paul Lech, was named co-portfoliomanager; however, Leverenz retains all discretionon portfolio trades. Lech has 12 years of industryexperience and joined Oppenheimer in 2008. Giv-en the fund's idiosyncratic portfolio, we are a littleconcerned about key-man risk. Lech's promotion isa positive step, and we hope he assumes more
portfolio decision-making responsibility in the nearfuture.
Parent Pillar: ¶ NeutralArt Steinmetz became CEO of OppenheimerFundsin July 2014, the firm’s first from its investmentranks, after managing several of its taxable-bondfunds for many years. Steinmetz replaced Bill Glav-in, who joined the firm in 2009 to help clean up themess that occurred following the 2008 financialcrisis, when several key Oppenheimer fixed-in-come funds suffered massive losses due to hiddenrisks. Since taking over, Steinmetz has been tryingto move Oppenheimer forward in a positive way,launching new funds and emphasizing offeringsthat can (he hopes) outperform in areas wherepassive and index vehicles don't do well.
Overall fund performance has improved since thefinancial crisis, and the company has made stridesin the area of manager ownership of fund shares.More than half of fund assets are run by man-agers with at least $1 million personally investedalongside fundholders, twice the level of twoyears ago. And although the firm’s average fee-level percentile still lands in the "average" rangefor fees overall, it represents continued improve-ment.
That being said, Oppenheimer still has to showthat it can attract and retain top portfolio man-agers in all parts of its business. It still remains tobe seen if Oppenheimer can stand out from the in-dustry set as it transitions from "fix-it" mode toone more of growth and new-product initiativesand one under new leadership.
Price Pillar: ∞ PositiveThe fund's fees are lower than those of similarlydistributed peers within the emerging-markets cat-egory. As such, this fund earns a Positive Price rat-ing.
The retail class A shares' fee for 2015 included amanagement fee of 0.77%, 12b-1 fees of 0.25%,other expenses of 0.29%, and a 0.01% waiver, fora total of 1.30%. That 1.30% level is lower thanthe median fee of 1.66% for emerging-marketsfunds distributed to retail investors with front
There are two institutional share classes: class Y,which charges 1.05%, and class I, which charges0.86%. These fees are lower than the institutionalgroup median of 1.25%.
The investment seeks to achieve both capital appreciation and current income. The fund's objective is to achieve both capitalappreciation and current income by investing primarily in a diversified portfolio of equity securities. Equity securities includecommon and preferred stock. Under normal circumstances, the fund will invest a minimum of 80% of its net assets (plus bor-rowings for investment purposes) in equity securities. At least 75% of the fund's total assets will normally be invested in equitysecurities that pay interest or dividends.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,160 10,048 12,074 13,114 19,724 25,233Fund 1.60 0.48 20.74 9.46 14.55 9.70+/- S&P 500 TR USD -0.07 0.20 -2.25 -0.58 0.10 2.67+/- Category -0.08 0.24 -0.83 1.53 1.61 3.54% Rank in Cat 63 27 61 20 11 1# of Funds in Cat 1,521 1,504 1,412 1,256 1,107 816* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
Y Wells Fargo & Co 4.93 54.27 BASE -1.86 [ 43.55 - 58.02Gilead Sciences Inc 4.46 72.23 BASE -1.14 [ 70.83 - 103.10
Y Charles Schwab Corp 3.95 41.22 BASE -0.51 [ 21.51 - 41.85Apple Inc 3.95 119.94 BASE 0.77 ] 89.47 - 119.96Walt Disney Co 3.82 108.25 BASE 0.19 ] 86.25 - 109.49
% Assets in Top 5 Holdings 21.10
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 23.00 23.00 18.22 18.14
p Industrials 21.94 22.12 18.60 11.52
d Healthcare 14.58 19.37 14.15 14.11
y Financial Services 13.57 13.57 4.30 16.52
s Consumer Defensive 9.27 15.22 9.27 9.50
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
This socially conscious fund is a good core option
for any investor.By David Kathman, CFA 11/14/2016
Parnassus Core Equity is a good illustration thatfunds following a socially conscious or ESG (envir-onmental, social, governance) mandate can alsobe superior long-term performers. Since Todd Ahl-sten began managing the fund in May 2001, its re-turns have been among the best in the large-blendMorningstar Category and have trounced the S&P500. These returns have been remarkably steady,beating the category in eight of the past 10 calen-dar years with much less volatility than the aver-age large-blend fund. Those great results, alongwith an experienced management team and dis-ciplined strategy, earn it a Morningstar AnalystRating of Silver.
Ahlsten and Ben Allen, his comanager since 2012,use a combination of negative and positivescreens to ensure the fund follows ESG principles.They avoid firms that get more than 10% of theirrevenue from alcohol, tobacco, gambling,weapons, or nuclear power, or which have finan-cial ties to Sudan. They prefer firms that scorewell on various governance, workplace, and envir-onmental criteria and which have good customerand community relations. They don’t avoid fossil-fuel stocks entirely, like some ESG funds do, butsuch stocks must clear an especially high bar tomake it into the portfolio.
Within those constraints, Ahlsten and Allen main-tain a portfolio of roughly 40 stocks, at least 75%of which must be dividend-payers, with an em-phasis on those having wide or increasing compet-itive advantages. In fact, 63% of the portfolio wasin stocks with wide Morningstar Economic MoatRatings as of Sept. 30, 2016, well above the 50%large-blend category average, and the averageholding was more profitable than the categorynorm.
That quality focus has been a big factor in thefund’s strong performance in down markets suchas 2008, but the managers are also willing to take
chances that can help the fund in up markets. Thefund currently has an overweighting relative to itspeers in industrial stocks, several of which haveposted nice gains in 2016, partially offsetting thestruggles of top holdings Gilead Sciences GILD andWells Fargo WFC, among others.
Process Pillar: ∞ PositiveThis fund has typical socially conscious restric-tions: It avoids companies deriving significant rev-enue from alcohol, tobacco, weapons, nuclearpower, or gambling, or those with ties to Sudan.However, Parnassus also emphasizes positive en-vironmental, social, and governance criteria, be-lieving that such criteria also identify companieslikely to outperform industry peers. They seek outfirms that score well on corporate governance, em-ployee benefits, stakeholder relations, products,environmental impact, and customer and supply-chain relationships.
From the 400 or so stocks that pass those screens,managers Todd Ahlsten and Ben Allen look forcompanies with wide or increasing economicmoats that sell increasingly relevant products orservices and that are guided by good management.While they do not make top-down sector calls,they buy when a stock is undervalued based on arange of outcomes incorporating a variety of mac-roeconomic scenarios. That can lead to sector bi-ases, but the managers avoid sector weightingsthat are more than twice that of the S&P 500benchmark. They also won't put more than 5% ofthe portfolio in any individual stock. The fund musthave 75% of assets in dividend-paying stocks, butthere is no particular emphasis on high dividendsor dividend growth.
This thorough, disciplined strategy earns the funda Positive rating for Process.
Todd Ahlsten and Ben Allen are patient, high-con-viction investors. They hold 40 or so names andinitiate a position only if they are willing to stakeat least 1% of assets. As of November 2016, theportfolio's biggest sector overweightings relativeto the S&P 500 were in industrials and basic ma-terials, both of which hurt returns in 2015 but re-
Parnassus Core Equity Fund - Institutional Shares PRILX
Analysis
bounded in 2016, and in consumer defensivestocks, which have been a modestly positive con-tributor.
The fund is significantly light in energy, consumercyclicals, and financials, though National OilwellVarco NOV, which the managers like for its so-cially responsible policies and wide moat, is a top-20 holding. The managers explicitly say that thefund is not fossil-fuel-free, as some socially re-sponsible peers are, but they have a high bar forenergy stocks to make it into the portfolio. Inspring 2015, they trimmed the fund's healthcareexposure, especially in biotech, because of valu-ation concerns. The fund now has a slight under-weighting in that sector, but it still owns suchstocks as Gilead GILD (the top holding as of Sept.30, 2016), CVS Health CVS, and Allergan AGN.
The second-largest holding as of Sept. 30, 2016,was Wells Fargo WFC, which was recently hit byrevelations that an overly aggressive sales culturehad led to the creation of fake accounts. Becauseof their initial conclusion that the firm has handledthe scandal well, the managers still held the stockas of late October.
Performance Pillar: ∞ PositiveThe fund has an excellent long-term record, earn-ing it a Positive Performance rating. As of Novem-ber 2016, its 10- and 15-year returns rank in thelarge-blend category's top 3%, and its five-year re-turns rank in the top decile. It also ranks in the top2% since Todd Ahlsten became manager in May2001 and in the top decile since Ben Allen be-came comanager in May 2012. Ahlsten got off to arocky start with an ill-timed cash stockpile andsome poor picks, but he soon righted the shipwhile Parnassus began building its research teamin earnest.
The fund beat the large-blend category in eight ofthe nine calendar years from 2006 through 2014,including top-decile finishes in 2007 and 2008.(Ahlsten made a good call by avoiding financialsahead of the crisis.) The one exception was 2010,when it landed in the bottom decile because ofpoor performance by such prominent holdings as
Cisco CSCO and Microsoft MSFT.
It bounced back with four straight years of solid,category-beating returns. It had an especially nicerun in 2014, when it gained 14% to rank in the cat-egory's top 11% and beat the S&P 500 benchmark,thanks to big gains from Allergan AGN and otherpicks such as Apple AAPL. It landed in the middleof the pack in 2015 and trailed the S&P 500, partlybecause of its energy exposure, but looked betterin the first 10 months of 2016, beating the cat-egory despite problems at top holdings GileadGILD and Wells Fargo WFC.
People Pillar: ∞ PositiveLead manager Todd Ahlsten is Parnassus' chief in-vestment officer. He joined the firm as a researchanalyst in 1995 and became director of research in1998. Ahlsten began comanaging this fund withParnassus' founder Jerome Dodson in 2001. Hetook over as sole manager in 2002 and has earnedexcellent results since. Ahlsten has more than $1million invested in this fund. His long track recordand investment help earn the fund a PositivePeople rating.
Ben Allen joined as comanager on May 1, 2012,and is Parnassus' director of research. Allen star-ted at Parnassus as an analyst in 2005 and waspart of a three-manager team that earned a nicerecord at Parnassus Mid-Cap PARMX from Octo-ber 2008 through April 2012 before moving on tothis fund. Allen has increased his investment here,and it now stands between $100,000 and$500,000.
While Ahlsten has final say on picks, each man-ager is responsible for half of the fund's 40 or soholdings. Ahlsten generally covers healthcare andtechnology stocks, while Allen favors industrialsand business services. They are supported by a 12-person team of research analysts, all of whomcontribute to this fund, though some have other re-sponsibilities as well. Five of these analysts serveas portfolio managers on other Parnassus funds(Matt Gershuny is director of research as well ascomanager of Parnassus Mid-Cap), while three ofthem primarily do ESG research.
Parent Pillar: ∞ PositiveParnassus Investments is an employee-ownedcompany founded by Jerome Dodson in 1984. Ithas six funds, the newest of which is an Asia fundlaunched in April 2013. While a foreign fund is afirst for the company, the firm has not grown reck-lessly; the last time it had launched a new fundwas in 2005. The firm has also steadily built its in-vestment team. In 2013, the firm hired from theoutside to bring fixed-income expertise to Parnas-sus Fixed Income PRFIX, but portfolio managersare generally promoted from the analyst ranks, andretention on the investment team is high.
The funds invest only in securities that pass its en-vironmental, social, and governance screens. Fromthere, the managers find companies with relevantproducts, sustainable competitive advantages,quality management, and ethical practices, and itbuys when the stock is undervalued. The fixed-in-come fund also uses equity research for securityselection.
In recent years, Parnassus has made a concertedeffort to attract 401(k) and institutional clients,which has resulted in steady, but manageable, in-flows. Most have gone to Parnassus Core EquityPRBLX, which has excellent long-term risk-adjus-ted performance. Manager investment is strong;Dodson has more than $1 million invested in eachof the three funds he manages, as does lead man-ager Todd Ahlsten of Core Equity. All this adds upto a Parent rating of Positive.
Price Pillar: ¶ NeutralThe 0.87% expense ratio of this fund's Investorshares is close to the median for its peer group,and the fund earns a Neutral rating for Price. Thefund's expenses have always been reasonable,and, as its asset base has grown, its net expenseratio has decreased gradually from 1.07% a dec-ade ago.
Institutional shareholders also get a good deal. Re-quiring a minimum investment of only $100,000,the share class charges 0.67% a year, below aver-
Prudential QMA Small-CapValue Fund Class Z$23,258.06Small Value $19,000.50S&P 500 TR USD $19,713.40
Investment Strategy
The investment seeks above-average capital appreciation. The fund normally invests at least 80% of its investable assets inequity and equity-related securities of small-cap companies. The subadviser considers small-cap companies to be companieswith market capitalizations within the market cap range of companies included in the Russell 2000 Index or the Standard &Poor's SmallCap 600 Index. While most assets will typically be invested in U.S. equity and equity-related securities, includingreal estate investment trusts (REITs), the fund may also invest in foreign equity and equity-related securities.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,037 9,988 15,119 13,458 20,000 23,258Fund 0.37 -0.12 51.19 10.41 14.87 8.81+/- S&P 500 TR USD -1.30 -0.40 28.20 0.37 0.41 1.78+/- Category -0.06 0.40 10.83 2.99 1.60 2.08% Rank in Cat 49 28 4 9 23 7# of Funds in Cat 436 431 409 347 308 196* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Last Price Day Chg % 52 Week Range
Hope Bancorp Inc 1.25 21.21 BASE -2.39 [ 13.59 - 22.56Washington Federal Inc 1.25 33.40 BASE -1.91 [ 19.10 - 35.95Sanmina Corp 1.24 35.80 BASE -1.78 [ 16.31 - 37.20
Y SkyWest Inc 1.19 37.20 BASE 0.68 ] 13.23 - 39.60Prosperity Bancshares Inc 1.02 71.16 BASE -2.01 [ 33.57 - 74.74
% Assets in Top 5 Holdings 5.95
TIncrease YDecrease RNew to Portfolio
Top Sectors 11-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 38.63 38.63 23.93 24.65
p Industrials 16.09 17.95 15.02 18.04
u Real Estate 12.79 12.79 5.94 7.36
t Consumer Cyclical 10.85 12.43 10.85 12.57
a Technology 5.39 12.71 5.39 12.15
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Prudential Total Return BondFund Class Q $17,792.15Intermediate-Term Bond$14,719.56BBgBarc US Agg Bond TRUSD $15,362.59
Investment Strategy
The investment seeks total return. The fund will seek to achieve its objective through a mix of current income and capital ap-preciation as determined by the fund's investment subadviser. It invests, under normal circumstances, at least 80% of thefund's investable assets in bonds. For purposes of this policy, bonds include all fixed-income securities, other than preferredstock, with a maturity at date of issue of greater than one year. The fund may invest up to 30% of its investable assets in highrisk, below investment-grade securities having a rating of not lower than CCC. It may invest up to 30% of its investable assetsin foreign debt securities.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,075 10,147 10,455 11,209 12,261 17,792Fund 0.75 1.47 4.55 3.88 4.16 5.93+/- BBgBarc US Agg BondTR USD
0.38 0.64 2.46 1.03 1.94 1.54
+/- Category 0.32 0.67 1.54 1.31 1.57 1.77% Rank in Cat 3 1 16 4 4 —# of Funds in Cat 1,045 1,037 981 865 755 540* Currency is displayed in BASE
Top Holdings 11-30-2016Weight % Maturity Date Amount Mil Value Mil
R US 5 Year Note (CBT) Mar17 23.71 03-31-2017 0.06 7,172.09
R US Ultra Bond (CBT) Mar17 5.60 03-22-2017 0.01 1,693.80
R US 10 Year Note (CBT) Mar17 5.05 03-22-2017 0.01 1,527.56
R Payb Fra 1.6 12072016 -2.88 12-07-2016 866.60 -871.61
R Recv Fra 2.86 12072016 2.88 12-07-2016 866.60 871.16
% Assets in Top 5 Holdings 34.36
T Increase Y Decrease R New to Portfolio
Top Sectors 11-30-2016Fund BMark Cat Avg
Other Government Related 48.04 — 4.62Corporate Bond 25.23 — 28.41Asset-Backed 9.97 — 4.06Commercial MBS 6.48 — 11.86Non-Agency Residential MBS 2.72 — 1.07
Fund Cat Avg
0 15 30 45 60
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
manager owned by a quiet insurance company.By Eric Jacobson 4/19/2016
Prudential Total Return Bond is run by a fixed-in-come group that rivals the largest in the industry interms of research manpower and boasts similarlymassive investments in number-crunching analyt-ics. The fruits of those efforts have earned thefund a good long-term record and a MorningstarAnalyst Rating of Bronze.
Prudential's history of running insurance assets--traditionally invested heavily in corporate bonds--has strongly influenced this fund’s strategy. Soeven though it's benchmarked against the BarclaysU.S. Aggregate Bond Index, it has a bias towardcredit. The fund's corporate exposure has longtopped the benchmark's once high-yield bonds,and bank loans are included (neither are in the in-dex). Corporate bonds and bank loans composed a46% share of the fund--which jumps to 59% if youinclude 14% in collateralized loan obligations--asof February 2016, compared with a 24% corporatestake in the index, and roughly a third of assets forthe intermediate-term bond Morningstar Category.
Though the implications for performance aren'tquite the same, the fund also had 21% in securit-ized assets as of February 2016 (once CLOs arestripped out), including both nonagency residen-tial and commercial mortgage-backed securities. Itheld a 3.6% sliver of U.S. Treasury and agency se-curities--down from 43% at the end of 2007--versus 73% for the index.
There's nothing inherently wrong with that profile,but it places the fund on the category's edge interms of credit risk; its rate sensitivity has also ris-en. It was buffeted by both rates and credit in2015, for example, pushing its return below themidpoint of distinct peers in its group. But despiteabove-average volatility, the fund has survivedrough credit markets without lasting damage: In2008, it had exposure to rallying Treasuries as itsother sectors struggled, placing in the category'smiddle. Combined with success during more-favor-
able markets, that has earned the fund top-deciletrailing long-term returns, and it offers the advant-age of recently reduced expenses. It cuts an at-tractive profile, albeit one that requires comfortwith its risks.
Process Pillar: ∞ PositiveThe strategy here is similar to those of its high-profile competitors. The fund's managers focus onfinding issues that have good fundamentals butgenerate a healthy amount of income. An analystrates every issue by fundamental value eachmonth, and sector managers rerank them based onrelative value among other sectors.
The team has long gravitated toward corporatecredit. In that context, the managers compare in-ternal credit scores against rating agencies', as-sign scores based on yield premiums versus thebroad market, and build rankings based on liquid-ity and event risk. Internally developed risk analyt-ics are then applied to portfolios.
The team targets a goal of 150 basis points of out-performance per year over the Barclays U.S. Ag-gregate Index, ideally averaging contributions ofroughly 75 basis points from sector allocation, 40basis points from subsector and security selection,and 35 basis points from plays on duration, cur-rency, and the yield curve. With the use of its riskmodels, the team also looks to cap the fund'stracking error at 250 basis points.
Overall, the fund has managed strong execution ofa straightforward, well-developed strategy, whichhas earned it a Positive Process Pillar rating.
The fund's credit emphasis has been more pro-nounced in recent years, as has a longer duration.After taking that figure to 3.8 years in March 2009,the fund's managers drove it up to 5.8 years as ofFebruary 2016, around a quarter-year longer thanthe benchmark and roughly a half-year longer thanthe intermediate-bond category institutional-shareaverage.
As of February, the fund held 46% in corporates,roughly three fourths of which were investment-
grade, and the rest high-yield bonds and bankloans. Another 14% was in CLOs, classified byPrudential as asset-backeds. Including the CLOs,the fund's credit exposure was more than 2 timesthe Barclays Aggregate Index's and close todouble the category average, depending on classi-fication quirks. Those numbers are high enough forthe fund to teeter on the edge of Morningstar'sdedicated corporate-bond category, which com-prises funds that have generally averaged morethan 65% in corporates.
The portfolio was rounded out with asset-backed(12.5% after stripping out CLOs) and commercial-mortgage-backed securities (8.8%) and exposureto foreign government debt (4.5%) and emerging-markets issues (6.1%). With only a 1.4% stake inagency mortgages, and 5.4% in Treasuries andagency debt, that leaves the fund with a massiveunderweighting in those sectors relative to itsbenchmark, and the category, albeit to a lesser de-gree.
Performance Pillar: ∞ PositiveThe fund's long-term record has been attractive:Its trailing returns of three years or longer all placein its category's best quartile. And though itsvolatility over those periods has been higher thanaverage, the fund hasn't suffered serious blows. Itearns a Positive Performance rating.
The ride has been a bit choppy at times. The fund'sduration was 3.8 years in early 2009 and rat-cheted up to 6.1 years by November 2015. Manyrivals trimmed rate sensitivity, though, producingdifferent relative outcomes.
When Treasury yields spiked between Oct. 8,2010, and Feb. 10, 2011, for example, the fund'sduration was still in the range of 4.5-4.9 years, andits 1.4% loss placed in the best third of distinctfunds in the group. Its duration was longer whenyields spiked in early 2013, hitting 6.1 years by theend of September from 5.3 years at March 31 ofthat year. As yields spiked from April 26 to Sept. 5,the fund lost 5.9% and placed near the bottom ofits category.
The fund has also been more aggressive with cred-it since 2008 when it placed in the category'smiddle, dipping to the group's bottom half duringthe third-quarter 2011 credit sell-off. The fund alsohad some poor relative months when credit soldoff in the second half of 2014 and then 2015, but itdidn't fare notably worse on a relative basis thanduring the third quarter of 2011.
People Pillar: ∞ PositiveThe fund is run by Michael J. Collins, Robert Tipp,Richard Piccirillo, and Gregory Peters; they alsomanage other portfolios for Prudential Financial,including Prudential Absolute Return Bond PADZX.They average 19 years of investment experienceand are backed by a fixed-income group with bigresearch manpower by virtue of a cadre of portfo-lio managers and 90 analysts. The group alsodraws on a 50-plus member team focused on pro-prietary analytics, risk management, and perform-ance attribution. The team's record and substan-tial resources earn it a Positive People Pillar rating.
Collins also manages some of the firm's othermultisector strategies. He has been at Prudentialsince 1986 and has experience as a high-yieldmanager and developing proprietary quantitativeinternational interest-rate and currency models.Tipp has been with the firm since 1991; he headsits global bonds team and drives global rate posi-tioning for several portfolios. Piccirillo has beenwith Prudential since 1993 and specializes in mort-gage- and asset-backed securities. Prior to joiningthe firm he worked as a fixed-income analyst forFischer Francis Trees & Watts. Peters has experi-ence as Morgan Stanley's global director of fixedincome and economic research and was respons-ible for the firm's macro research and asset-alloca-tion strategy. His prior experience included stintsat Salomon Smith Barney and the U.S. Treasury.
Parent Pillar: ¶ NeutralThe Prudential funds are a small piece of Pruden-tial Investment Management, which in turn is partof conglomerate Prudential Financial. They havesome notable strengths, including a culture that'spositive in many ways. The fixed-income team iswell-resourced and risk-aware, the actively man-aged equity funds are run with an established, re-
peatable investment process, and the Prudentialfunds as a group have respectable long-term re-cords. Nearly all of them are subadvised by subsi-diaries of PIM, primarily Jennison, QuantitativeManagement Associates, and Prudential Fixed In-come.
Prudential has launched three or four new funds ayear since 2010, and it plans to launch more.These have mostly been in popular areas such ashigh yield, alternatives, and emerging markets, butPrudential says it will only launch new funds forwhich it already has the resources. The firm hasbroadened its distribution over the past decade sothe funds are widely available among third-partydistributors.
Prudential's funds are overseen by an engaged,active board. The trustees have approved cheapexpenses on the firm's biggest funds, but acrossthe lineup, fees are about average. In addition,manager investment in the Prudential funds is sub-par overall, so that managers' interests aren't asaligned with shareholders' as they could be. That,plus the middling overall fees, keep the firm'soverall Parent rating at a Neutral.
Price Pillar: ∞ PositiveThe fund's pricing had historically been a mixedbag, with share classes holding half its assets allpriced below average relative to their respectivepeer groups of similarly distributed funds, whilethe other half of the fund's asset base residing inclasses charging above-average fees. Prudentialaddressed that problem in early 2016, however,contractually limiting expenses on the fund's vari-ous share classes, beginning April 1, 2016, throughFebruary 2017. They're not required to maintainthat agreement, but it would be unusual for a bondfund to raise its prices after such a move. At thenew levels, just enough assets are priced belowaverage to push the fund's Price Pillar rating toPositive.
The investment seeks the highest total return over time con-sistent with an emphasis on both capital growth and income.The fund invests in a diversified portfolio of other T. RowePrice stock and bond funds that represent various assetclasses and sectors. It is intended for retired investors whoseek income and relative stability from bonds along withsome capital appreciation potential from stocks. The fund's"neutral allocations," which are what T. Rowe Price con-siders broadly appropriate for investors during their retire-ment years, are 40% stock funds and 60% bond funds.While the fund is non-diversified, it invests in diversified un-derlying holdings.
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Multiple layers of proven managers.By Leo Acheson 11/18/2016
Strong underlying funds, a tested asset-allocationapproach, and low fees provide T. Rowe Price Re-tirement Balanced a meaningful advantage relat-ive to peers. The fund earns a Morningstar Ana-lyst Rating of Silver.
T. Rowe Price created this fund and the firm's Re-tirement target-date series in September 2002.The funds have many similarities; Jerome Clarkhas served as the lead manager of both since theirinception, providing exceptional stability for in-vestors. The funds also use the same underlying T.Rowe Price strategies and have very similar sub-asset-class allocations. The primary difference isthat Retirement Balanced maintains a static40%/60% stock/bond mix, whereas the target-date funds strategically reduce equity exposure asthe investor ages. Additionally, to give RetirementBalanced a slightly more conservative bent, it hasa higher allocation to inflation-linked bonds, whichassume half of the fixed-income sleeve as com-pared with one third for the in-retirement target-date vintages.
The team supporting Clark and the skippers run-ning the underlying funds are an impressive bunch.T. Rowe Price has recently grown its asset-alloca-tion group, which stands at 32 members, and itplans to continue adding resources over the nexttwo years. Meanwhile, 11 of the 16 underlyingfunds are Morningstar Medalists, indicating ouranalysts' belief that the strategies will outpacecompetitors and benchmarks over the long haul.Three funds that represent relatively small weight-ings earn Neutral ratings, and two funds are notcovered by Morningstar.
Multiple layers of skilled management have led toimpressive results. The fund has gained 6.2% an-nualized since its inception through October 2016,outpacing its typical 30% to 50% equity allocationMorningstar Category norm by 1.4 percentagepoints. Strong security selection has driven themajority of outperformance; tactical asset alloca-
tion has also provided a small tailwind.
Low fees improve the odds that this fund will con-tinue to come out ahead of the pack. Overall, in-vestors have a strong choice here.
Process Pillar: ∞ PositiveThis fund benefits from a consistent approach,earning it a Positive Process rating. T. Rowe Pricedesigned this fund in 2002 for investors who wanta static asset-allocation throughout retirement.The fund targets a 40%/60% stock/bond split, andit typically does not stray far from this mix.However, management can tactically adjust its ex-posures by up to 5 percentage points to try toboost returns. T. Rowe Price's asset-allocationcommittee determines these tilts, drawing uponthe firm's fundamental research and years of ex-perience to make relative valuation decisions,forecasting over a six- to 18-month time horizon.
Sixteen underlying T. Rowe Price funds fill out theallocations. The managers span stocks, bonds, andreal assets, as well as a range of sectors, marketcaps, investment styles, and geographic regions. Inorder to maintain purchasing power for investors,the fund keeps a healthy 30% stake in a short-dur-ation inflation-linked bond fund. Managementkeeps another 20% of assets in an intermediate-term bond fund and spreads the rest of the fixed-income sleeve across high-yield bonds, interna-tional bonds, and emerging-markets bonds.
T. Rowe Price Equity Index 500 represents half ofthe equity sleeve. While this strategy's 0.27% ex-pense ratio is low compared with actively man-aged large-cap funds, it is overpriced versus otherS&P 500 funds.
The underlying T. Rowe Price managers are astrong group. Morningstar analysts rate 14 of thefunds; 11 receive medals, meaning the analystsexpect them to outperform peers and indexes overa full market cycle. In aggregate, the MorningstarMedalists account for more than 60% of the fund'sassets. Three funds receive Neutral ratings,though each takes up less than 3.5% of total as-sets. T. Rowe Price Limited Duration Inflation Fo-
cused Bond assumes 30% of assets; Morningstaranalysts don't rate that fund, though it is a relat-ively straightforward inflation-protected strategy.
Historically, the fund's broad allocations haven'tstrayed too far from its strategic allocation of 40%stocks/60% bonds. That broad asset mix matchesthe typical competitor's in the 30%-50% equity al-location Morningstar Category, though the fund in-vests more heavily in foreign equities. Currently,about 13% of assets are allocated to foreignstocks, compared with the category median ofabout 8%. This positioning also reflects a modesttactical overweighting to foreign stocks that T.Rowe Price’s allocation committee has main-tained since 2013.
Meanwhile, the committee has tilted the portfoliohistorically (and currently) to high-quality, large-cap growth stocks on the domestic-equity side. Ithas recently increased exposure to high-yield andemerging-markets bonds, citing attractive yieldsand improving fundamentals.
Performance Pillar: ∞ PositiveThe fund has amassed a strong long-term record,earning it a Positive Performance Pillar rating. Dur-ing the past 10 years through September 2016, itgained 5% annualized, outpacing its custombenchmark and typical 30% to 50% equity alloca-tion Morningstar Category peer by 50 basis points.(The blended benchmark has evolved over time,though it currently consists of 30% Barclays U.S.Aggregate Bond Index, 30% U.S. Treasury Infla-tion Protected Securities 1-5 year Index, 12%MSCI ACWI ex USA Index, and 28% Russell 3000Index.) The fund has had similar volatility relativeto its typical peer and bogy, so its risk-adjustedresults look similarly strong.
Attribution provided by T. Rowe Price shows thatsecurity selection by the underlying T. Rowe Pricemanagers explains most of the outperformance.Tactical asset-allocation tilts have also been addit-ive, though to a lesser extent.
Much of the fund's relative strength has come dur-ing tumultuous periods. It landed in the top third of
its peer group during 2008 and 2015, and it alsoheld its own during the summer of 2011, which isimpressive given the fund's above-average inter-national-equity stake relative to the categorynorm. The fund has also turned in respectable res-ults during rising markets. In fact, it has avoidedthe bottom third of its peer group in every calen-dar year since its February 2002 inception.
People Pillar: ∞ PositiveJerome Clark, who joined the firm in 1992, hasmanaged this fund and the firm's target-dateseries since their 2002 inception. Wyatt Lee, alongtime associate to Clark, officially joined themanager roster in August 2015. A deep and grow-ing asset-allocation team supports them. Thegroup currently stands at 32 investment profes-sionals, including five that recently joined fromother parts of the firm. The team expects to makea number of additional hires during the next twoyears, reflecting a strong commitment to the as-set-allocation space. In addition to enhancing thefirm's current multiasset offerings, the team plansto built out its custom solutions capabilities.
Richard Whitney announced he will retire at theend of 2016, which has led to changes. CharlesShriver and David Giroux replaced Whitney as co-chairs of T. Rowe Price’s 12-member asset-alloca-tion committee in October 2016. The committeeguides the fund's modest tactical decisions and iscomposed of leaders from the firm’s equity andfixed-income teams. Sebastien Page, a recentPIMCO transplant, will replace Whitney as thesole head of asset-allocation strategies. Page fo-cuses primarily on product development andidentifying growth opportunities.
The underlying fund managers used in the seriesare also a sound and well-respected bunch. Withmultiple layers of quality managers, the seriesearns a Positive People rating.
Parent Pillar: ∞ PositiveT. Rowe Price is an industry leader, with a stronglineup of funds across asset classes. The firm'sdisciplined, risk-conscious investment process hasconsistently produced successful results across itsfund lineup, often with less volatility than peers.
Many managers spend their careers at the firm,providing continuity for fund shareholders. Man-ager retirements are typically announced well inadvance, allowing for a long transition process.
After a few unexpected departures of top man-agers in 2013 and 2014 and an uptick in analystdepartures on the U.S. equity team, the pace ofturnover has slowed. The departure of head offixed income Mike Gitlin was a surprise, but thefirm quickly filled the role with 31-year T. RowePrice veteran Ted Wiese. Other executive changeshave been handled with ease, including that ofCEO James Kennedy, who will be succeeded byBill Stromberg in 2016. Meanwhile, the firm is in astrong financial position and remains amply re-sourced.
T. Rowe Price has acted in fundholders' interestsby closing funds with surging asset bases andavoiding trendy fund launches. Reasonable feesand a manager compensation plan focused onlong-term performance are other pluses. One areaof weakness is manager ownership of fund shares,which is not among the industry's best and couldstand to improve.
Price Pillar: ∞ PositiveThe fund’s no-load retail share class, which holdsthe bulk of assets, charges just 0.57%, ranking inthe lowest quintile of its peer group. The Advisorand R share classes also charge below-averagefees. Moreover, the fund's expenses match thoseof the underlying strategies, meaning T. RowePrice doesn't charge an additional fee for con-structing and managing the overall portfolio. Thefund receives a Positive Price rating.
T. Rowe Price introduced an institutional shareclass of the fund in September 2015. The newshare class has an expense ratio of 0.47% andminimum investment of $1 million, furthering thefirm’s commitment to provide low-cost offerings.
The investment seeks to track the performance of a bench-mark index that measures the investment return of the over-all U.S. stock market. The fund employs an indexing invest-ment approach designed to track the performance of twobenchmark indexes. With approximately 60% of its assets,the fund seeks to track the investment performance of theCRSP U.S. Total Market Index. With approximately 40% ofits assets, the fund seeks to track the investment perform-ance of the Barclays U.S. Aggregate Float Adjusted Index.
Style Map
DeepVal
CoreVal
Core CoreGrow
HighGrow
Micro
Small
Medium
Large
Giant Weighted Averageof holdings
75% of fund’s stockholdings
Asset Allocation
Asset Class % Net
Cash 1.48US Stock 58.71Non US Stock 0.41Bond 39.39Other 0.02
ManagementStart Date
Joshua C. Barrickman 02-22-2013Christopher E.Wrazen 07-07-2015
William A. Coleman 04-26-2016Gerard C. O’Reilly 04-26-2016
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Vanguard Balanced Index takes a straightforwardapproach to asset allocation, maintaining a steady60% stock/40% bond allocation. The fund's index-based holdings lead to a portfolio with relativelyhigh-quality fixed-income securities and broad ex-posure to the U.S. stock market, and they havealso produced more stable returns than most alloc-ation--50% to 70% equity Morningstar Categorypeers. These positive attributes, along with rock-bottom fees, have resulted in category-leading res-ults and earn the fund a Morningstar Analyst Rat-ing of Gold.
This fund stands out among its peers for its simpli-city. Unlike many rival fund managers who use tac-tical management to adjust attributes like overallstock/bond weighting, credit quality, or growthand value tilts, this fund doesn't waver. Maintain-ing this predictable mix mitigates the risk of ill-timed portfolio changes. Its stock portfolio tracksthe CRSP U.S. Total Stock Market Index, which in-cludes virtually the entire domestic stock market,while the bond sleeve follows the BloombergBarclays U.S. Aggregate Float Adjusted Bond In-dex, which serves as a proxy for U.S. investment-grade taxable bonds. The result is a U.S.-centricportfolio, whereas the fund's average peer investsabout 10% in foreign equities. And fixed-incomepicks don't reach below investment-grade debt,while the average moderate-allocation fund in-vests over 21% of fixed-income assets in unratedbonds or those rated BB and below.
The low-maintenance approach hasn't hamperedthis fund's performance over the long term--overthe past 10 years through November 2016, for ex-ample, its 6.3% annualized gain ranks in its peergroup's top quintile. It has achieved those resultswith less volatility than most, as shown by aSharpe ratio that tops about 85% of peers overthat period. Eschewing foreign holdings hasprovided a tailwind recently, as domestic equitieshave generally led the market since 2013. Mean-while, the fund's fixed-income allocation provided
a buffer in 2015's second half as high-yield mar-ket liquidity concerns dragged down many peers.
Process Pillar: ∞ PositiveThis fund maintains a near constant 60%/40% bal-ance between U.S. stocks and bonds. While manyallocation funds will make shifts in asset alloca-tions, this fund doesn't waver. To the extent pos-sible, the fund will use cash flows, both into andout of the portfolio, in order to bring the allocationback toward its target. The implication is that fol-lowing a period of strong equity market appreci-ation, the fund will add to its fixed-income portfo-lio to bring the balance back to 60%/40% (andvice versa). Historically, a disciplined rebalancingapproach has helped to keep relative volatility incheck, earning the fund a Positive Process rating.
The equity sleeve follows the CRSP U.S. TotalStock Market Index, which tracks nearly everystock in the U.S. market and allows it to achievethe level of diversification deemed optimal by theefficient-market hypothesis. The fund holds nearly3,300 names, spanning mega- to micro-cap stocks.
The fixed-income side of the portfolio also followsa passive approach, tracking the BloombergBarclays U.S. Aggregate Float Adjusted Bond In-dex. The fund holds about 6,800 bonds comparedwith about 10,000 in the index. Because of thelarge number of bonds in the index and their lackof trading volume, it is common for bond funds toengage in sampling. Still, this fund carefully replic-ates the index's key characteristics, such as dura-tion and credit quality.
The fund's equity exposure stays in line with its in-dex's norms, and some of these traits distinguish itfrom the moderate-allocation crowd. Because ofthe expansive nature of its target stock index, theCRSP U.S. Total Stock Market Index, it has consid-erably more sector and industry breadth and some-what more market-cap diversification than the ma-jority of its peers. It replicates a purely domesticstock index, so it normally has nothing in foreignequities; most of its rivals invest about 11% oftheir stock assets abroad. Yet the fund's market-cap-weighting approach means that giant-cap
Vanguard Balanced Index Fund Institutional Shares VBAIX
Analysis
names such as Apple AAPL, Exxon Mobil XOM,and Microsoft MSFT hold the largest sway.
Government and government-backed securitiesdominate the bond side of the portfolio. The aver-age duration of the fund's holdings, a proxy for in-terest-rate risk, is longer than the category aver-age. However, this reflects the index, which ex-cludes securities with less than one year to matur-ity. In addition, the fund strives to be fully inves-ted, so it holds less cash than the category aver-age. The credit quality of the portfolio is slightlyhigher than the category's because the index ex-cludes high-yield securities. The index also ex-cludes Treasury Inflation-Protected Securities. Inaddition to these omissions, the fund lacks expos-ure to international fixed-income securities,whereas most funds in the category include astake.
Performance Pillar: ∞ PositiveThis fund's cost advantage has helped it generateattractive long-term performance relative to thelarge-growth category, supporting the Positive Per-formance Pillar rating. Although the fund's com-position may cause performance to vary from thetypical moderate-allocation fund, its steady andbroadly diversified asset mix isn't likely to becometoo far out of favor. In fact, the fund has neverlanded in the bottom half of its peer group acrossthree-year rolling periods for the 10-year periodthrough November 2016. Meanwhile, the fund's6.3% return beats 83% of peers over the sameperiod.
On top of its strong performance, the fund has notdistributed any capital gains in the past decade.Steady inflows aid the rebalancing process andthe equity index team's effective trading tech-niques also reduced gains.
The exceptionally diversified nature of its stockand bond portfolios serves to moderate risk. Overthe past 10 years, the fund's standard deviation isless than about 85% of its category peers. Be-cause the fund has consistently produced above-average returns with below-average risk, its risk-adjusted return ranking is slightly better than its
rank based purely on return. The fund's investor re-turns suggest that some investors became disillu-sioned with the promise of diversification in 2008.After all, the fund was still down 22% that year.But patient investors recouped their losses in lessthan two years.
People Pillar: ∞ PositiveVanguard's Equity Index Group uses a team-basedapproach. Portfolio manager rotation is part of thenormal course of business, and the team believesthat this further develops expertise, benefitingfundholders. As a result, manager Christine Fran-quin was taken off this fund's roster as of April2016, but she continues to manage other indexfunds at the firm. Gerard O'Reilly and Bill Colemanreplaced Franquin. O'Reilly has been with Van-guard since 1992 and has managed stock indexportfolios since 1994. He comanages a number ofother index funds, including Vanguard Growth In-dex VIGIX and Vanguard Total Stock Market IndexVTSAX. Coleman joined Vanguard in 2006 and runsother stock index funds as well as Vanguard's tar-get-date funds.
Joshua Barrickman has managed the fund's bondportfolio since February 2013. Barrickman, wholeads the fixed-income indexing group, joined Van-guard in 1998 and has comanaged the firm's bondfunds since 2005. He also oversees the $130 bil-lion Vanguard Total Bond Market Index VBTLX,which has the same index as the bond portion ofthis fund. Christopher Wrazen joined the fund in2015 when previous comanager Paul Malloy took anew position managing fixed-income operations inLondon. The managers' long tenures and indexingexpertise continue to earn a Positive People rating.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a PositiveParent rating. Its consistent messages to investorsto keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,
five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor saleschannel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveVanguard's investment philosophy is based on theconcept of low-cost investing, and this fund is noexception, earning a Positive Price rating. The Ad-miral share class, which has a minimum initial in-vestment of $10,000, has an expense ratio of0.08%, while the Investor share class, which has aminimum initial investment of $3,000, charges0.22%. The median expense ratio for the categoryis 0.91%. Thus, this fund enjoys an enormous costadvantage over its peers. Unlike many of Van-guard's funds, this fund does not offer an ex-change-traded fund share class. However, in-vestors could invest a similar 60/40 split in cheap-er broad-market ETFs Vanguard Total Stock Mar-ket VTI and Vanguard Total Bond Market BND, butthis approach requires that the investor rebalanceto maintain the target allocation.
Vanguard Equity-IncomeFund Admiral Shares$20,769.54Large Value $16,411.20S&P 500 TR USD $19,713.40
Investment Strategy
The investment seeks to provide an above-average level of current income and reasonable long-term capital appreciation. Thefund invests mainly in common stocks of mid-size and large companies whose stocks typically pay above-average levels of di-vidend income and are, in the opinion of the purchasing advisor, undervalued relative to other such stocks. In addition, the ad-visors generally look for companies that they believe are committed to paying dividends consistently. Under normal circum-stances, it will invest at least 80% of its assets in equity securities. The fund uses multiple investment advisors.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,054 9,955 12,345 13,209 18,896 20,770Fund 0.54 -0.45 23.45 9.72 13.57 7.58+/- S&P 500 TR USD -1.13 -0.73 0.46 -0.31 -0.88 0.56+/- Category -0.58 -0.14 -2.19 2.01 0.96 2.11% Rank in Cat 89 64 66 10 28 5# of Funds in Cat 1,327 1,317 1,270 1,091 934 681* Currency is displayed in BASE
Top Holdings 09-30-2016Weight % Last Price Day Chg % 52 Week Range
T Microsoft Corp 4.53 62.35 BASE -0.54 [ 48.03 - 64.10
T Johnson & Johnson 3.27 114.78 BASE 0.16 ] 94.28 - 126.07
T JPMorgan Chase & Co 2.93 84.60 BASE -2.34 [ 52.50 - 88.17
T General Electric Co 2.68 31.42 BASE 0.21 ] 27.10 - 33.00
T Wells Fargo & Co 2.53 54.28 BASE -1.84 [ 43.55 - 58.02
% Assets in Top 5 Holdings 15.94
TIncrease YDecrease RNew to Portfolio
Top Sectors 09-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 15.72 17.17 15.72 20.41
a Technology 14.01 14.44 13.64 12.83
p Industrials 13.51 13.51 13.09 10.75
s Consumer Defensive 12.92 12.92 11.83 9.10
d Healthcare 12.59 12.63 12.59 13.06
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Aided by a tiny fee hurdle, Vanguard Equity-In-come’s subadvisor duo has combined to producestrong risk-adjusted results, earning it a Morning-star Analyst Rating of Silver.
The fund has the wind at its back whenever in-vestors seek safety in yield-rich sectors. That’sbeen the case during the past year through May2016. Concerns about slowing global growth andeasy money policies benefited dividend payers inthe utilities, telecom, and consumer staples sec-tors. Relative to its typical peer, the fund’s beenoverweight in each of these three sectors and its25% combined stake, as of April 2016, ranked inthe large-value Morningstar Category’s top decile.That weighting, along with strong performers liketop-five holding Johnson & Johnson JNJ, helpedthe fund to a top-decile 4% one-year gain throughMay 2016. Although the fund modestly lagged itsFTSE High Dividend Yield Index benchmark duringthe same stretch, it maintains a longer-term edgeagainst that bogy.
The fund has achieved this record by pairing teamsfrom Wellington Management and Vanguard's in-house quantitative equity group. Michael Reck-meyer has led Wellington’s two thirds of the port-folio since year-end 2007. James Stetler has over-seen the rest of the fund’s assets for Vanguard’steam since 2003.
The teams use complementary strategies. Reck-meyer runs a roughly 60-70 stock portfolio ofabove-average dividend payers that he tries to buywhen they’re out of favor. That can get him intotrouble, as it did here by owning Marathon OilMRO when it cut its dividend in late 2015. Overall,though, Reckmeyer has shown good judgment,selling ConocoPhillips COP well before its di-vidend cut and making timely buys like adding toHome Depot HD in late 2013. The Vanguard teamrounds out the portfolio by taking small stakes in100-plus stocks based on factors like valuation andearnings sustainability.
The fund’s income mandate leaves it prone toshort-term underperformance when interest ratesspike, as they did briefly in 2013. But its strongmanagement, sound approach, and low fees makeit a good long-term option.
Process Pillar: ∞ PositiveTwo subadvisors here take distinct but effectiveapproaches to finding value in the market's short-term dislocations, earning the fund a Positive Pro-cess Pillar rating. Manager Michael Reckmeyer,who runs about two thirds of the fund's assets, isa stickler for dividends, valuations, and healthybalance sheets. He buys stocks with above-aver-age dividends and low valuations but unappreci-ated growth prospects. Typically, these stocks of-fer a yield above the S&P 500's upon purchase.Unlike the strategy he runs for Vanguard Welles-ley Income VWINX, however, his portfolio here canhold a stock if its yield falls below the S&P 500's.Reckmeyer can be contrarian, adding to solid butout-of-favor stocks whose challenges are morethan reflected in their share prices. While he gen-erally holds stocks for about four to five years,Reckmeyer is quick to sell if stocks' fundamentalsdeteriorate or hit their target price. He can alsoswap a name for a similar stock trading at a bet-ter valuation.
Vanguard's James Stetler and his quant teammanage about one third of the fund's assets. Theyrely on computer models that pick stocks from theFTSE High Dividend Yield Index based on valu-ation, growth, management decisions (stock buy-backs, dividend increases, and so on), momentum,and earnings sustainability. They turn their portfo-lio over more than Reckmeyer, but the fund's over-all turnover still tends to be below average.
The fund has a diverse portfolio of about 150-200dividend-paying stocks. They consistently producean above-average yield versus the large-value cat-egory norm, although they are typically well-capit-alized firms. Currently, the fund derives its top-decile 2.8% trailing 12-month yield from stocksthat, on average, have a return on assets thatranks near the category's top quartile. The fund
largely steers clear of higher-yielding stocks,which can signal a distressed dividend or limitedgrowth prospects.
While Vanguard's portion of the portfolio doesn'tstray too far from the U.S.-focused FTSE High Di-vidend Yield Index, Wellington's Michael Reck-meyer has recently found a number of attractivelyvalued dividend payers overseas. Since early 2013,the fund's foreign stake has hovered around 10%.Most of these holdings are multinationals that paystout dividends, like British American TobaccoBATS, which has a wide Morningstar EconomicMoat Rating.
Sector weightings tend to stay fairly close to thefund's benchmark but can diverge dramaticallyfrom the Russell 1000 Value Index. Financialsclaimed 16.1% of the fund's assets, as of April2016. That's more than any other sector but stillfar below the Russell index's 28.6% stake. Whileexposure to dividend havens like telecom and util-ities (a combined 13.4% presently) can be signific-ant, the fund is more diversified than most income-oriented peers.
Performance Pillar: ∞ PositiveThe fund's Positive Performance Pillar rating re-flects its strong record under the current subad-visor lineup. Since Wellington Management andVanguard's in-house quantitative equity group be-came solely responsible for this fund's asset basein late 2005, its 8.2% annualized gain through May2016 beats the Russell 1000 Value Index by 1.7percentage points and lands in the large-value cat-egory's top decile, with below-average volatility.
Wellington's management team underwent achange at year-end 2007, when Michael Reckmey-er took over the lead role from John Ryan. Thattransition went smoothly because Reckmeyer hadbeen a longtime member of the firm's valueequity-income team and he uses the same ap-proach as his predecessor. The fund has contin-ued to fare well. From January 2008 through May2016, it has topped the Russell index in 41 of 42five-year rolling periods. The fund has had lesssuccess against the FTSE High Dividend Yield In-
dex, its primary prospectus benchmark since mid-2007, but maintains a slight cumulative edgeversus that bogy during the same period.
Vanguard does not disclose individual subadvisors'results, but Reckmeyer's use of a nearly identicalstrategy on Hartford Equity Income HQIAX gives asense of how the two teams have done. Althoughthe Hartford fund has a bit better long-term grossreturns, there are years when the quant groupadds value, like 2011.
People Pillar: ∞ PositiveConsistent and capable subadvisor leadershipearns the fund a Positive People Pillar rating. Sincelate 2005, the fund's assets have been splitbetween anchor Wellington Management andVanguard's in-house quantitative equity group.Wellington, a subadvisor here since 2000, boastsample resources in overseeing about two thirds ofassets. Michael Reckmeyer took over as lead man-ager of Wellington's slice in late 2007 and hasbeen a member of the firm's eight-person valueequity-income team since 1994. Its five analystsand two other portfolio managers have on aver-age more than 20 years of industry experience.Two members of the otherwise Boston-basedteam live in London. They divide coverage primar-ily by sector. The team also draws upon the firm's50-plus global industry analysts.
The quantitative equity group runs the rest of theportfolio. James Stetler has been investing at Van-guard since 1996 and has been running a slice ofthis fund since 2003. In early 2012, the quantgroup, which runs Vanguard's passive index fundsand active quant strategies, added manager Mi-chael Roach, who has been with the family since1998 and investing since 2001. Binbin Guo cameaboard in early 2016, replacing James Troyer, whohad joined the fund at the same time as Roach.The entire group includes about 20 strategists,analysts, and managers combined, who have onaverage more than a decade of industry experi-ence.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a Positive
Parent rating. Its consistent messages to investorsto keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor saleschannel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveRock-bottom fees earn the fund a Positive PricePillar rating. The Investor shares' 0.26% fiscal2015 expense ratio, which applied to about onefourth of the fund's assets, was 66 basis pointsbelow the large-cap no-load peer median andlower than 95% of those peers. The Admiralshares, which contain the rest of the fund's assets,were even cheaper at 0.17%, which also beat 95%of their rivals’. Modest trading costs were anotherplus. Brokerage fees of 0.01% of average net as-sets fell well below the category norm of 0.29%.
The fund's price tag will shift, however. Vanguardpays subadvisor Wellington an asset-based fee,with breakpoints, and the expense ratio also in-
The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitaliza-tion stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. compan-ies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that makeup the index, holding each stock in approximately the same proportion as its weighting in the index.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,167 10,028 12,296 13,313 19,618 19,718Fund 1.67 0.28 22.96 10.01 14.43 7.03+/- S&P 500 TR USD 0.00 0.00 -0.03 -0.03 -0.03 0.00+/- Category -0.01 0.03 1.40 2.09 1.49 0.87% Rank in Cat 50 45 32 5 13 21# of Funds in Cat 1,521 1,504 1,412 1,256 1,107 816* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
Y Apple Inc 3.19 119.94 BASE 0.77 ] 89.47 - 119.96
Y Microsoft Corp 2.50 62.35 BASE -0.54 [ 48.03 - 64.10
Y Exxon Mobil Corp 1.94 87.08 BASE 0.86 ] 71.55 - 95.55
Y Johnson & Johnson 1.62 114.78 BASE 0.16 ] 94.28 - 126.07
Y JPMorgan Chase & Co 1.60 84.60 BASE -2.34 [ 52.50 - 88.17
% Assets in Top 5 Holdings 10.84
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 18.58 18.58 17.70 18.14
y Financial Services 16.21 16.21 15.14 16.52
d Healthcare 13.75 15.66 13.75 14.11
p Industrials 11.03 11.27 10.92 11.52
t Consumer Cyclical 10.97 11.31 10.66 11.63
Fund Cat Avg
0 5 10 15 20
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
This is one of the best S&P 500 trackers available.By Adam McCullough 11/22/2016
Vanguard Institutional Index offers investors diver-sified exposure to U.S. large-cap stocks. A low feeand a soundly constructed and reasonably repres-entative portfolio leave the fund well-positioned tocontinue its long streak of producing superior risk-adjusted returns relative to its peers over the longhaul, and underpin its Morningstar Analyst Ratingof Gold.
Broad diversification is an intrinsic advantage offund’s replication of the market-cap-weighted S&P500, which covers approximately 80% of the in-vestable market capitalization of the U.S. equitymarket. While most indexes follow mechanical,rules-based approaches, the S&P 500 is managedby committee. Yet, this index has performed simil-arly to other popular large-cap indexes, such asthe Russell 1000. Its market-cap-weighting ap-proach can be beneficial in bull markets that arecharacterized by large-cap leadership, such as thepost-financial-crisis charge in U.S. stocks. Thatsaid, it can also lead to significant sector- andsingle-security concentration, as witnessed at theheight of the technology bubble. So market-cap-weighted indexes’ greatest strength is arguablyalso their Achilles’ heel.
Low turnover is another key advantage of thefund’s broad market-cap-weighted approach.Lower turnover equates to lower costs and a less-er likelihood of taxable capital gains distributions.The average annual turnover the fund was 6% dur-ing the past five years. This compares with a medi-an figure of 55% for its category peers.
The fund’s sector weights are similar to its large-cap blend peers. But its holdings' average marketcapitalization is usually greater than the categoryaverage, partially due to its weighting approach,which pulls the portfolio toward giant- and large-cap stocks.
During the 15-year period ended October 2016, thefund returned 6.89% per year, outstripping the
U.S. large-blend Morningstar Category average by0.41 percentage points per year. Much of this rel-ative outperformance can be attributed to thefund’s sizable fee advantage. At 0.04%, VINIX’sannual levy is a tiny fraction of the 0.79% medianfee charged by its category peers.
Process Pillar: ∞ PositiveThe fund employs full replication to track the S&P500. This index effectively diversifies risk, pro-motes low turnover, and accurately represents itstarget market segment, supporting the PositiveProcess rating. This index has a slight quality tiltbecause of its conservative eligibility require-ments. For instance, stocks must pass profitabilityscreens before they are eligible to be added in theindex. However, that does not mean that the in-dex will have superior performance. While qualify-ing stocks must pass some quantitative screens, acommittee selects the final stocks for the index.This committee gives the S&P 500 a greater de-gree of flexibility than indexes that follow more-mechanical rules, though it also reduces transpar-ency. The smallest constituent of the index had amarket capitalization of $2.4 billion at the end ofOctober 2016.
The constituents of this index account for approx-imately 80% of the total market cap of the U.S.stock market. Many of the fund’s largest holdingsare multinational firms, giving it substantial indir-ect international exposure. About half of theindex's constituents' revenue is generated outsideof the United States. The portfolio managers usedividend reinvesting and derivatives to keep pacewith the benchmark. The fund has historically usedsecurities lending to generate additional income tooffset expenses.
This is a well-diversified offering that capturesnearly 80% of the investable U.S. equity market.Its top-10 holdings represent just under 20% of theportfolio, half of the Morningstar Category aver-age. Top holdings include household names suchas Apple AAPL, Microsoft MSFT, and Exxon MobilXOM. The average market capitalization of thefund’s holdings is currently 35% larger than itstypical large-cap blend peer. However, sector
Vanguard Institutional Index Fund Institutional Shares VINIX
Analysis
weightings here are similar to the large-blend cat-egory average. The technology, healthcare and fin-ancial-services sectors represent the fund's largestsector weightings, while the real estate, utility,and materials sectors carry the smallest weight-ings.
Stocks are added and removed from the S&P 500at the committee’s discretion, so it can be difficultto anticipate changes ahead of time. Because thisis one of the most widely tracked indexes, changestend to move stock prices. In January 2010, S&Pannounced Berkshire Hathaway would be added tothe index, and Berkshire’s stock price appreciatedmore than 10% over the next few days.
The portfolio managers can use index derivativesto keep the fund fully invested and manage re-demptions. Over the trailing 10 years throughSeptember 2016, the fund averaged only a 0.3%cash allocation, about a tenth of its actively man-aged peers'.
Performance Pillar: ∞ PositiveThe fund has generated a strong long-term per-formance compared with its mutual fund peers inthe large-blend Morningstar Category, which sup-ports the Positive Performance Pillar rating. Overthe trailing 15 years through October 2016, thefund’s return topped the large-cap blend categoryaverage 0.4 percentage points each year. Thefunds’ cost advantage has contributed the most toits outperformance over the long run.
Because the fund generates its edge from its lowcost, its advantage is consistent. Over the trailing13 years through October 2016, the fund’s rollingthree-year returns landed in the top half of the cat-egory 99% of the time. And because it was fullyinvested, this fund performed worse than the cat-egory average during the bear market drawdownfrom October 2007 to March 2009. But its sub-sequent recovery more than made up for theslightly larger drawdown.
The fund benefits from securities lending and theuse of derivatives to efficiently track its index. Ithas not distributed a capital gain over the prior
decade. And its annualized tax-cost ratio was0.4% over the past 15 years, compared with the0.8% average of all S&P 500-tracking funds. Thatplaces this offering in best decile of S&P 500-tracking funds.
People Pillar: ∞ PositiveA well-equipped group manages all of Vanguard’sequity index funds. The team's extensive experi-ence, deep bench of talent, and strong trading in-frastructure underpin this fund's Positive PeoplePillar rating.
Donald Butler and Scott Geiger have managed thisfund since 2000 and 2016, respectively. Butler is aPrincipal of Vanguard Group, has been with thefirm since 1992, and managed investment portfoli-os there since 1997. Geiger has been with Van-guard since 2006 and began managing portfoliosin 2013. Butler and Geiger comanage four Van-guard funds, including Vanguard Extended Market,Vanguard S&P 500 Value and Vanguard 500 Index.
According to the Statement of Additional Informa-tion, Geiger has less than $10,000 invested in thefund and Butler doesn’t have any money invested.Vanguard links the managers' compensation to op-erating efficiency, which helps keep costs low andaligns their interests with investors’. Minimizingcosts and tracking-error are their primary object-ives. Vanguard has automated much of this pro-cess and provides the managers with robust toolsto handle flows, corporate actions, and bench-mark changes.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a PositiveParent rating. Its consistent messages to investorsto keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor saleschannel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveThis is among the cheapest S&P 500-trackingfunds. It charges a razor-thin 0.04% fee, well be-low the large-blend category median of 0.79%,earning it a Positive Price Pillar rating. While it re-quires a $5 million minimum purchase, the fund isavailable on select 401(k) platforms. Vanguard 500Index Adm VFIAX offers the same portfolio and itsETF equivalent Vanguard 500 ETF VOO, are avail-able at a 0.05% fee. VFIAX requires an initial pur-chase of $10,000, but VOO does not carry an in-vestment minimum.
The Vanguard Instl Index Plus VIIIX only charges0.02%, but carries a $200 million initial purchase.
The fund manages cash with index derivatives andgenerates additional income with securities lend-ing, which benefits shareholders.
The investment seeks to track the performance of a benchmark index that measures the investment return of small-capitaliza-tion growth stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP USSmall Cap Growth Index, a broadly diversified index of growth stocks of small U.S. companies. The advisor attempts to replic-ate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock inapproximately the same proportion as its weighting in the index.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,278 10,091 12,753 11,641 18,255 22,337Fund 2.78 0.91 27.53 5.19 12.79 8.37+/- S&P 500 TR USD 1.11 0.63 4.53 -4.84 -1.66 1.35+/- Category 0.38 0.01 -0.46 0.45 0.55 1.16% Rank in Cat 41 50 55 46 39 19# of Funds in Cat 704 701 673 600 533 390* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
T Diamondback Energy Inc 0.65 100.54 BASE -0.82 [ 56.59 - 113.23
Y SVB Financial Group 0.65 170.46 BASE -3.42 [ 77.87 - 180.48
Y HD Supply Holdings Inc 0.62 41.72 BASE -0.33 [ 21.26 - 44.20
T Newfield Exploration Co 0.59 42.30 BASE 0.99 ] 20.84 - 50.00
T Signature Bank 0.57 148.22 BASE -3.02 [ 113.53 - 157.46
% Assets in Top 5 Holdings 3.08
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 21.15 21.50 21.01 24.11
u Real Estate 15.18 15.18 14.45 4.03
t Consumer Cyclical 15.10 16.15 15.10 14.18
p Industrials 14.68 15.81 14.19 17.38
d Healthcare 13.14 16.89 13.14 16.44
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Vanguard Small Cap Growth Index is one of thecheapest funds of its kind. Its cost advantage, lowturnover, and broad market-cap-weighted portfo-lio support its Morningstar Analyst Rating of Sil-ver.
The fund invests in the faster-growing and moreexpensive half of the U.S. small-cap market andweights its holdings by market capitalization.While these companies tend to grow more quicklythan their large-cap counterparts, they also carrygreater risk. Most of the fund's holdings lackmeaningful competitive advantages and may nothold up as well as large caps during market down-turns. Therefore, this fund is best suited as a satel-lite holding for investors with a high risk tolerance.Growth is attractive, but it must exceed the mar-ket's expectations to translate into superior re-turns. There is always a risk that investors' expect-ations for the fund's holdings may be overly optim-istic.
Because this fund covers approximately half thesmall-cap market, it includes some stocks withonly modest growth characteristics. These hold-ings help limit the fund's exposure to more ex-pensive, and potentially riskier, stocks. The fundhas less overlap with its value counterpart (Van-guard Small Cap Value Index VSIAX) than do rivalvalue and growth funds based on the Russell 2000and S&P SmallCap 600 indexes. Many of its sec-tor weightings are similar to the small-growthMorningstar Category average, but it has muchgreater exposure to the real estate sector.
Low fees give the fund a sustainable edge over thelong run. Over the past decade, the fund’s Investorshare class landed in the top quintile of its cat-egory. The Admiral share class enjoys an evengreater cost advantage. Its 0.09% fee is only afraction of the median levy for small-cap no-loadfunds (1.16%).
In 2013, Vanguard transitioned from the MSCI USSmall Cap Growth Index to the CRSP US Small CapGrowth Index, citing potential cost savings. TheCRSP index has generous buffer rules to mitigateturnover and transaction costs. Tax efficiency addsto the fund's appeal. It hasn't distributed a capitalgain in the past decade.
Process Pillar: ∞ PositiveThe fund employs full replication to track the CRSPUS Small Cap Growth Index. This broad, market-cap-weighted index diversifies risk and helps keepturnover low relative to the category, earning thefund a Positive Process Pillar rating.
CRSP ranks all U.S. stocks by market cap and ex-cludes the largest 85% and smallest 2% from themid-cap universe. It then assigns composite valueand growth scores to each of these stocks usingseveral metrics. The growth metrics include pro-jected short- and long-term earnings-per-sharegrowth, three-year historical earnings and sales-per-share growth, current investment/assets, andreturn on assets. The last metric penalizes com-panies for undisciplined growth. CRSP evaluatesvalue on book/price, forward and trailingearnings/price, dividend yield, and sales/price. Itfully allocates stocks with the strongest growthcharacteristics to the small-cap growth index untilit represents half the assets in the small-cap mar-ket.
CRSP keeps 100% of each stock in its respectivestyle index until it passes through a buffer zone. Atthat point, it only moves 50% of the stock fromone style index to the other. If the stock stays onthe opposite side of the buffer zone at the follow-ing quarterly review, CRSP will transfer the re-maining half. This mitigates turnover where it doesnot significantly affect the fund's style character-istics.
This is a broadly diversified portfolio that includesmore than 600 holdings, which helps limit expos-ure to speculative growth names and company-specific risk. These include firms such as Wage-Works, Lions Gate Entertainment, and Domino'sPizza. About 30% of the fund’s holdings, repres-
Vanguard Small-Cap Growth Index Fund Institutional Shares VSGIX
Analysis
enting 21% of the portfolio, were not profitableover the trailing 12 months through May 2016.
Like most of its peers, the fund has greater expos-ure to the healthcare and technology sectors andless exposure to financial services and utilitystocks than the broad CRSP US Small Cap Index.However, it has much greater exposure to real es-tate stocks than the category average. It is alsolighter than average in the financial services andtechnology sectors.
Market-cap weighting skews the portfolio towardthe larger names in its target market segment,which are not necessarily the fastest growing. Butthis weighing approach also promotes lowturnover, as do the fund’s style-buffering rules,which allow stocks with slowing growth to stay inthe portfolio longer. At the end of May, consensusanalyst estimates indicated that the fund’s hold-ings had slightly lower expected growth rates thanthe category average. The fund also had a largermarket cap orientation than most of its categorypeers and the Russell 2000 Growth and S&PSmallCap 600 Growth Indexes.
Performance Pillar: ∞ PositiveThe fund has regularly outperformed its peers inthe small-growth category, and thus warrants aPositive Performance Pillar rating. Over the trail-ing 10 years through May 2016, the fund landed inthe category's top quintile, outpacing the categoryaverage by 1.4 percentage points annualized, withcomparable volatility. This was largely due to itscost advantage and its peers’ poor stock selectionin the consumer cyclical and healthcare sectors.
Performance also looks good over shorter horizons.In fact, the fund's returns ranked in the top half ofthe small-growth category average in 95% of allthree-year rolling period over the trailing 13 yearsthrough May 2016. It has also been fairly tax-effi-cient. The fund has not distributed a capital gain inthe past 10 years. Vanguard offers a separate ex-change-traded fund share class of this fund, whichallows the managers to transfer low-cost-basisshares out of the portfolio in a tax-free transac-tion with the ETF's market makers. This structure
may help make the fund more tax-efficient than itspeers.
Full index replication has kept tracking error low.Over the trailing 12 months through May 2016, thefund's Admiral and Investor share classes trailedthe benchmark by 8 and 17 basis points, respect-ively, less than the amount of their fees. This ispossible due to securities-lending income.
People Pillar: ∞ PositiveA well-equipped group manages all of Vanguard’sequity index funds. The team's extensive experi-ence, deep bench of talent, and strong trading in-frastructure underpin this funds' Positive PeoplePillar rating.
Vanguard occasionally rotates managers across itsequity index funds. It added William Coleman as anamed manager on this fund in April 2016. Cole-man has worked at Vanguard since 2006 and hasbeen a named manager on some of Vanguard’sother index funds since 2013. He joined GerardO'Reilly, who has managed the fund since the endof 2004. O’Reilly has served as a portfolio man-ager at Vanguard since 1994 and is a Principalwith the firm. Both managers are members of Van-guard's Global Equity Index Group, which offerstrade execution and risk-management support forthe fund.
O'Reilly and Coleman manage several other indexfunds including Vanguard Total Stock Market In-dex, Vanguard FTSE Social Index, and VanguardSmall Cap Value Index. However, Vanguard's teamapproach and supporting infrastructure keep thisworkload manageable.
The managers do not have any money invested inthis fund. Vanguard links their compensation to op-erating efficiency, which helps keep costs low andalign their interests with investors’. Minimizingcosts and tracking error are their primary object-ives.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a PositiveParent rating. Its consistent messages to investors
to keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor saleschannel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveVanguard charges a razor-thin 0.08% expense ra-tio for the fund's Admiral shares and 0.20% for theInvestor shares, which makes it the cheapestsmall-cap growth mutual fund available and sup-ports the Positive Price Pillar rating. The minimuminvestments for the Investor and Admiral sharesare $3,000 and $10,000, respectively. Vanguardcharges a $20 annual account maintenance fee forbalances below $10,000, though investors canavoid it by agreeing to receive statements andfund documents electronically. Vanguard also of-fers this fund in an ETF format, Vanguard Small-Cap Growth ETF VBK, for a 0.08% fee with no min-imum investment. The fund engages in securitieslending, which generates ancillary income thatpartially offsets the fund's expenses.
The investment seeks to track the performance of a benchmark index that measures the investment return of small-capitaliza-tion stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small CapIndex, a broadly diversified index of stocks of small U.S. companies. The advisor attempts to replicate the target index by in-vesting all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the sameproportion as its weighting in the index.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,181 10,038 13,386 12,598 19,722 22,169Fund 1.81 0.38 33.86 8.00 14.55 8.29+/- S&P 500 TR USD 0.14 0.10 10.87 -2.03 0.09 1.26+/- Category 0.94 0.51 -1.44 1.26 1.54 1.49% Rank in Cat 9 21 60 36 29 17# of Funds in Cat 822 816 759 627 534 361* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
T Targa Resources Corp 0.31 58.90 BASE 1.66 ] 14.55 - 59.97
T Diamondback Energy Inc 0.28 100.54 BASE -0.82 [ 56.59 - 113.23
T SVB Financial Group 0.28 170.46 BASE -3.42 [ 77.87 - 180.48
T Advanced Micro Devices Inc 0.28 9.98 BASE -5.63 [ 1.75 - 12.42
Y Huntington Ingalls Industries Inc 0.27 189.12 BASE -1.34 [ 118.20 - 197.28
% Assets in Top 5 Holdings 1.43
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
p Industrials 16.39 16.73 15.43 18.18
a Technology 14.84 15.32 14.84 15.07
y Financial Services 14.46 14.46 12.90 18.98
t Consumer Cyclical 13.06 14.81 13.06 14.02
u Real Estate 12.58 12.64 12.09 6.97
Fund Cat Avg
0 5 10 15 20
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
Vanguard Small Cap Index is a compelling market-cap-weighted fund that balances accurately rep-resenting the U.S. small-cap stock market withkeeping turnover low. Its well-diversified portfolio,efficient index construction, and low expense ra-tio should provide an edge over its peers. It earnsa Morningstar Analyst Rating of Gold.
The fund tracks the CRSP U.S. Small Cap Index andoffers well-diversified exposure to small-cap U.S.stocks. The index targets U.S. stocks smaller thanthe largest 85% by market capitalization and lar-ger than the smallest 2%. This brings in more than1,000 holdings, most of which have not yet estab-lished durable competitive advantages and tend tobe riskier than larger stocks. But the fund effect-ively diversifies firm-specific risk. Its top 10 hold-ings represent about 3% of assets, compared withthe small-blend Morningstar Category average of22%.
The fund has two primary advantages that reduceits transaction costs. It invests in larger stocksthan most of its category peers, which tend to bemore liquid and less expensive to trade than theirsmaller counterparts. And its index employs bufferrules that wait to move a stock until it is squarelyin an adjacent size segment and then only moveshalf the position at once. This reduces unneces-sary trades and the market impact cost of trading.The fund’s average five-year turnover of 16% is aquarter of the small-cap blend category average.
In early 2013, the fund changed its underlying in-dex to the CRSP U.S. Small Cap Index from theMSCI U.S. Small Cap Index to reduce expenses.The change nearly doubled its holdings’ averagemarket capitalization. Despite the change, thefund’s low fee and thoughtful index construction(current and prior) has paid off. Over the trailing 10years through September 2016, it bested the cat-egory average by 1.6 percentage points annuallywith similar volatility. More favorable stock expos-
ure in the energy, telecom, and financial sectorscontributed the most to this outperformance.
Process Pillar: ∞ PositiveThe fund’s efficient broad, market-cap-weightedconstruction; thoughtful buffer rules; and lowturnover underpin its Positive Process Pillar rating.The fund tracks the CRSP U.S. Small Cap Index,which targets U.S. stocks smaller than the largest85% ranked by market capitalization and largerthan the smallest 2%.
Its index will likely incur lower transaction coststhan some of its index peers because it owns lar-ger stocks, which are less expensive to trade, andapplies generous buffer rules to limit turnoverwhere it doesn’t significantly affect the fund’sstyle characteristics. When the index does movepositions into or out of the portfolio, it breaks thetrade in half to smooth the transition between sizesegments and further reduce transaction costs.
To be included in the index, at least 12.5% of thestock’s shares must publicly trade, and like most ofits index peers, the fund weights it holdings byfree-float market capitalization. Stocks must alsomeet trading liquidity hurdles. The index rebal-ances quarterly. In early 2013, the fund changedits underlying index to the CRSP U.S. Small Cap In-dex from the MSCI U.S. Small Cap Index to reduceexpenses.
The portfolio is well diversified. It holds more than1,000 stocks, and its top 10 holdings representless around 3% of the portfolio compared with thesmall-blend category average of 22%. Top hold-ings include Arthur J. Gallagher & Co. AJG, New-field Exploration AFX, and Regency Centers REG.On average, the fund’s holdings tend to generatelower returns on invested capital than the cat-egory norm.
Market-cap weighting skews the portfolio towardthe larger stocks in the small-cap segment andkeeps turnover down. Indeed, the fund’s market-cap orientation is nearly double the category aver-age, and turnover has averaged 16% over the pastfive years, just a quarter of the category average’s.
Vanguard Small-Cap Index Fund Institutional Shares VSCIX
Analysis
This weighting approach allows market prices todetermine the portfolio’s sector weightings. Mostof the fund’s sector weightings are similar to thecategory average, but it has a greater real estatesector weight and less exposure to the financialsector.
The fund’s index switch in early 2013 nearlydoubled its holdings’ average market capitaliza-tion. Since the switch, mid-cap stocks have repres-ented about 40% of the portfolio, while the cat-egory average’s share has remained near 20%.
Performance Pillar: ∞ PositiveThe fund’s low fee and thoughtful index construc-tion (current and prior) has paid off. Over the trail-ing 10 years through September 2016, it beat theMorningstar Category average by 1.6 percentagepoints annually, with similar volatility, placing itsquarely in the top quintile of the category. There-fore, it earns a Positive Performance Pillar rating.More favorable stock exposure in the energy, tele-com, and financial sectors contributed the most tothis outperformance. Over the trailing three-, five-,and 10-year periods, the fund has also topped itscategory average on a risk-adjusted basis. ItsSharpe ratio has ranked around the 20th percent-ile over these three time periods compared withthe small-cap blend category average.
The fund experienced slightly higher drawdownsthan the category average during the global finan-cial crisis from October 2007 through March 2009.This was likely because its holding’s average mar-ket-cap was smaller than its peers and it re-mained fully invested. However, it bounced backnicely. From the March 2009 market bottomthrough September 2016, the fund enjoyed a 1.1percentage point annualized return advantage overthe category. Because index funds are always fullyinvested, they will likely perform well during bullmarkets, but fall more in bear markets.
People Pillar: ∞ PositiveA well-equipped group manages all of Vanguard'sequity index funds. The team's extensive experi-ence, deep bench of talent, and strong trading in-frastructure underpin this fund’s Positive PeoplePillar rating.
Vanguard occasionally rotates managers across itsequity index funds. It replaced Michael Buek withWilliam Coleman and Gerard O'Reilly as namedmanagers on the fund in April 2016. O'Reilly joinedVanguard in 1992 and has served as a portfoliomanager since 1994. Coleman has been with Van-guard since 2006 and has served as a named port-folio manager there since 2013. Both managersare members of Vanguard's Global Equity IndexGroup, which offers trade execution and risk-man-agement support for the fund. Coleman and O'Re-illy run several other funds, including VanguardBalanced Index VBIAX, Vanguard FTSE Social In-dex VFTSX, and Vanguard Small Cap Value IndexVSIAX. Vanguard's team approach keeps thisworkload manageable.
The managers do not have any money invested inthis fund. Vanguard links their compensation to op-erating efficiency, which helps keep costs low andalign their interests with investors'. Minimizingcosts and tracking error are their primary object-ives. Vanguard has automated much of this pro-cess and provides the managers with robust toolsto handle flows, corporate actions, and bench-mark changes.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a PositiveParent rating. Its consistent messages to investorsto keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor sales
channel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveVanguard charges a 0.08% fee for the fund, pla-cing it among the cheapest funds in the small-capblend Morningstar Category and supporting itsPositive Price Pillar rating. Its fee is considerablylower than the median small-cap blend fee of1.05%. The fund uses securities lending to helpoffset expenses.
The Investor and Admiral share classes have a$3,000 and $10,000 investment minimum, respect-ively. For accounts with less than a $10,000 bal-ance, the Admiral share class charges a $20 peryear account service fee. This fee is waived forthose who sign up for electronic document deliv-ery.
Vanguard Total InternationalStock Index Fund AdmiralShares $11,363.55Foreign Large Blend$10,843.29MSCI ACWI Ex USA NR USD$11,263.13
Investment Strategy
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks issued bycompanies located in developed and emerging markets, excluding the United States. The fund employs an indexing investmentapproach designed to track the performance of the FTSE Global All Cap ex US Index, a float-adjusted market-capitalization-weighted index designed to measure equity market performance of companies located in developed and emerging markets, ex-cluding the United States. The index includes approximately 5,715 stocks of companies located in 45 countries.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,345 10,197 11,687 10,049 13,309 11,364Fund 3.45 1.97 16.87 0.16 5.88 1.29+/- MSCI ACWI Ex USA NRUSD
1.14 -1.24 -1.02 0.98 0.70 0.04
+/- Category 0.42 0.04 5.34 0.96 -0.29 0.38% Rank in Cat 23 42 11 28 60 —# of Funds in Cat 830 817 766 610 545 333* Currency is displayed in BASE
Top Holdings 12-31-2016Weight % Last Price Day Chg % 52 Week Range
T Nestle SA 1.10 73.35 BASE -0.95 [ 72.20 - 74.90
T Novartis AG 0.85 71.50 BASE -0.83 [ 67.00 - 84.00
T Roche Holding AG Dividend Right Cert. 0.81 235.30 BASE -0.13 [ 218.30 - 269.30
T HSBC Holdings PLC 0.80 669.50 BASE -1.59 [ 392.37 - 685.22
T Toyota Motor Corp 0.79 — BASE -1.58 [ 4,917.00 - 7,355.00
% Assets in Top 5 Holdings 4.35
TIncrease YDecrease RNew to Portfolio
Top Sectors 12-31-2016Fund 3 Yr High 3 Yr Low Cat Avg
y Financial Services 21.42 22.14 21.31 19.21
p Industrials 12.13 12.13 11.81 12.96
t Consumer Cyclical 11.62 12.43 11.49 12.28
s Consumer Defensive 9.68 10.47 9.62 12.25
a Technology 9.36 9.36 8.52 9.73
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
This is one of the cheapest and broadly diversified
funds in its category.By Matthew Diamond 9/7/2016
Vanguard Total International Stock Index is a well-run, one-stop shop for broad exposure to stockslisted in foreign developed and emerging markets.Its diversified, market-cap-weighted portfolio anda sizable cost advantage from one of the industry’stop stewards support its Morningstar Analyst Rat-ing of Gold.
The fund owns approximately 6,000 stocks acrossall developed (excluding the United States) andemerging markets, representing 98% of the in-vestable market. It employs a market-cap-weight-ing approach that promotes low turnover andskews the portfolio toward large multinationalswith global operations, such as Nestle NSRGY,Toyota TM, and pharmaceuticals Roche RHHBYand Novartis NVS. These companies tend to bemore profitable and less volatile than their smal-ler counterparts.
Sector weightings are consistent with the averagefund in the foreign large-blend Morningstar Cat-egory, but the fund has above-average exposure toemerging-markets companies. Emerging-marketsstocks currently account for 15% of the portfolio,compared with the 7% category average. As a res-ult, the fund has an overweighting to Chinesestocks and an underweighting to developedEurope, including the United Kingdom, comparedwith its category peers.
Although recent emerging-markets performancehas been a drag on returns, this fund’s cost ad-vantage gives it an edge over the long term. Itstrailing 10- and 15-year returns through July 2016best more than two thirds of its category peers.Vanguard’s unique ability to offer an exchange-traded fund share class increases the fund’s taxefficiency. Managers are able to mitigate capitalgains by transferring shares out of the portfolio ina tax-free transaction, known as an in-kind re-demption, with the ETF’s market makers. Lowturnover also reduces capital gains.
Like most of its peers, the fund does not hedge itscurrency risk, which can hurt performance andboost volatility when the U.S. dollar strengthensrelative to foreign currencies. The fund has signi-ficant exposure to the euro, Japanese yen, andBritish pound.
Process Pillar: ∞ PositiveThis fund employs near full replication to track theFTSE Global All Cap ex U.S. Index. This broad, mar-ket-cap-weighted index promotes low turnover, ef-fectively diversifies risk, and accurately reflectsthe composition of its target market. These attrib-utes support the fund’s Positive Process rating.
The index comprises more than 5,700 constituentsacross all foreign developed and emerging mar-kets. FTSE defines an investable universe that con-sists of all stocks listed in foreign developed andemerging markets that pass certain liquidityscreens. The index sorts them on free-float-adjus-ted market cap and targets those representing thelargest 98% of the universe by market cap. This in-cludes large-, mid-, and small-cap stocks. The in-dex then applies additional screens for liquidityand foreign ownership eligibility to make it easierto track. It also employs buffering rules to reduceunnecessary turnover.
Vanguard applies a fair value pricing policy, ad-justing the fund’s net asset value to reflect up-to-date market information for securities with staleprices. This policy protects shareholders from mar-ket-timing arbitragers who may otherwise exploitstale NAVs. Because there is no corresponding ad-justment to the index, this can create tracking er-ror over the short term, but long-term performanceshould closely match the index’s.
This portfolio effectively diversifies company-spe-cific risk. The fund’s top 10 holdings account forless than 10% of assets, compared with the for-eign large-blend category average of more than25%. The portfolio ventures further into mid- andsmall-cap territory than most of its peers. Con-sequently, its holdings have a small average mar-ket cap. The fund has a combined 20% of assets in
Vanguard Total International Stock Index Fund Admiral Shares VTIAX
Analysis
small- and mid-cap stocks, compared with 11% forits typical peer, which adds a modest diversifica-tion benefit. Similar to other market-cap-weightedpeers, financial services firms account for thefund’s largest sector allocation, representingnearly one fifth of assets. Such large banks as HS-BC Holdings HSBA, Commonwealth Bank of Aus-tralia CBA, and Royal Bank of Canada RBC areamong the fund’s top 20 holdings.
This fund may hold overseas-listed depository re-ceipts in lieu of, or in addition to, the domestic list-ings of index constituents. As a result, the fund ac-tually has more holdings than its index has con-stituents.
Performance Pillar: ∞ PositiveSolid index tracking and peer-beating long-termperformance earn this fund a Positive Perform-ance rating. During the trailing 10- and 15-yearperiods through July 2016, the fund’s Investorshares outperformed the category average by 39and 68 basis points annualized, respectively, withcomparable volatility. That lands it ahead of morethan two thirds of its category peers. The fund’sAdmiral share class was incepted in 2010, and itsmodest cost advantage should further boost long-term performance.
The fund’s relatively high emerging-markets alloc-ation makes it susceptible to periods of significantunderperformance when emerging markets lag de-veloped markets. In 2013 and 2015, the fundtrailed the category average by 4.4% and 2.78%,respectively, as a result of poor emerging-marketsperformance, landing it in the category’s bottomquartile both years.
Vanguard changed the fund’s index over the years,most recently in June 2013, making it difficult toassess its long-term tracking error, but the fundhas used near full index replication the past threeyears through July 2016 to keep tracking errorreasonably low. Vanguard utilizes a fair value pri-cing policy that can create modest tracking errorover short time horizons.
People Pillar: ∞ PositiveVanguard’s equity index funds are managed by a
capable and experienced team with extensive in-ternal support, supporting this fund’s PositivePeople rating.
The fund is managed by comanagers MichaelPerre and Michelle Louie, CFA. Perre has been anamed manager of the fund since 2008. Perrebegan his career at Vanguard in 1990 and is cur-rently a principal at the firm. Louie was promotedfrom equity trader to portfolio manager in 2016and simultaneously named comanager of the fund.Both managers are members of Vanguard’s globalequity index group, which offers trade executionand risk-management support for the fund. Van-guard has a long-standing practice of rotatingmanagers across its funds to facilitate their devel-opment.
Although this is the only fund they comanage to-gether, both separately manage several otherequity index funds, including Vanguard TotalWorld Stock Index VTWSX, Vanguard EmergingMarkets Index VEIEX, and Vanguard DevelopedMarkets Index VTMGX. Vanguard’s team ap-proach and support offered by its global equity in-dex group helps keep the workload manageable.
The managers do not have any money invested inthis fund. Vanguard links their compensation to op-erating efficiency, which helps keep costs low andalign their interests with fund investors’. Minimiz-ing costs and tracking error are their primary ob-jectives.
Parent Pillar: ∞ PositiveVanguard has one of the mutual fund industry’sstrongest corporate cultures and earns a PositiveParent rating. Its consistent messages to investorsto keep costs low, diversify, and stay the courseare reflected in the firm’s own behavior.Vanguard’s U.S. fundholders own the firm throughsmall investments by each mutual fund, mitigatingpotential conflicts of interest that can exist at oth-er firms that are serving two masters. Fund per-formance is strong overall: Over the past three-,five-, and 10-year periods, its Morningstar Suc-cess Ratios are greater than 70%--high amonglarge, diversified fund families.
Over the past year, the firm has collected morethan USD 200 billion in net inflows, thanks in largepart to investors’ interest in passive investing. Thefirm's indexing and ETF prowess, low costs, andsuccess in penetrating the financial-advisor saleschannel all have fueled growth. Total assets un-der management now exceed USD 3.3 trillion, giv-ing Vanguard a significant more-than-20% marketshare across U.S. mutual funds.
Vanguard has been a global player for years buthas only more recently turned its focus to growinginternationally. The firm is a large player in Aus-tralia, where it has the most history, but doesn'tyet have the brand recognition and trust it enjoysin the United States in other parts of the world.While non-U.S. funds don't participate in the own-ership of Vanguard, the firm's investorcentric cul-ture extends globally.
Price Pillar: ∞ PositiveThe fund’s 0.12% expense ratio for the Admiralshare class and 0.19% for the Investor share classmake it one of the most competitively priced fundsin the foreign large-blend category. The averageannual fee in the category is 1.12%. The Investorand Admiral share classes have a minimum invest-ment requirement of $3,000 and $10,000, respect-ively. Vanguard also manages an identical ETF,Vanguard Total International Stock ETF VXUS, for a0.13% fee with no minimum. The fund engages insecurities lending, which helps offset the fund’sexpenses.
The investment seeks long-term growth of capital. The fund pursues its investment objective by investing primarily in commonstocks selected for their growth potential, and normally invests at least 50% of its equity assets in medium-sized companies.Medium-sized companies are those whose market capitalization falls within the range of companies in the Russell Midcap®Growth Index. Market capitalization is a commonly used measure of the size and value of a company. It may also invest in for-eign securities, which may include investments in emerging markets.
Performance 01-13-2017
YTD 1 Mo 1 Yr 3Yr Ann 5Yr Ann 10Yr Ann
Growth of 10,000 10,331 10,148 12,630 13,471 20,142 24,712Fund 3.31 1.48 26.30 10.44 15.03 9.47+/- S&P 500 TR USD 1.64 1.20 3.31 0.41 0.58 2.45+/- Category 0.36 0.34 5.88 5.04 3.38 2.58% Rank in Cat 34 30 13 2 — —# of Funds in Cat 671 667 644 589 505 368* Currency is displayed in BASE
Top Holdings 09-30-2016Weight % Last Price Day Chg % 52 Week Range
T Sensata Technologies Holding N.V. 2.63 41.85 BASE 0.80 ] 29.92 - 42.00Crown Castle International Corp 2.54 86.71 BASE 1.20 ] 75.71 - 102.82
T Lamar Advertising Co Class A 2.48 73.48 BASE 1.53 ] 49.73 - 73.93Verisk Analytics Inc 2.08 82.07 BASE -0.69 [ 64.79 - 86.00
T PerkinElmer Inc 1.94 53.35 BASE -1.05 [ 39.50 - 57.28
% Assets in Top 5 Holdings 11.67
TIncrease YDecrease RNew to Portfolio
Top Sectors 09-30-2016Fund 3 Yr High 3 Yr Low Cat Avg
a Technology 30.34 32.27 29.70 19.53
p Industrials 24.43 27.40 24.43 18.78
d Healthcare 18.58 18.58 15.54 15.48
t Consumer Cyclical 12.06 12.06 8.90 17.70
y Financial Services 5.42 6.18 5.33 9.23
Fund Cat Avg
0 10 20 30 40
Dividend and Capital Gains DistributionsDistributionDate
Morningstar Analyst RatingMorningstar evaluates mutual funds based on five keypillars, which its analysts believe lead to funds that aremore likely to outperform over the long term on a risk-adjusted basis.
This hot fund is about to close to new investors.By Greg Carlson 12/16/2016
Janus Enterprise has grown by leaps and boundslately, but it is about to close to new investors.The fund's experienced skipper and prudent ap-proach continue to merit a Morningstar AnalystRating of Bronze.
Manager Brian Demain has run this mid-growthfund for more than nine years, and while it typic-ally hasn’t blown away the competition in a singleyear, it has shone more recently, and its recordduring his tenure is strong. From Nov. 1, 2007,through Nov. 30, 2016, the fund surpassed morethan 80% of its peers on both a total-return andrisk-adjusted basis (based on Sortino and Sharperatios) and outpaced its Russell Midcap Growthbenchmark on both measures.
Investors have taken notice: Between the start of2015 and November 2016, the fund took in a net$5.7 billion, more than doubling its size, and De-main now manages a total of $13 billion in thisstrategy. Thus, it was comforting when Janus an-nounced on Dec. 9 that the fund will close to newinvestors on Jan. 27, 2017.
Funds often close too late, but this pool of assetsshould be manageable given Demain’s measuredstrategy. He typically favors mid-cap firms with re-latively stable revenues, economic moats, and im-proving returns on invested capital, and he hangson to them for an average of six to seven yearswhile avoiding big individual positions (top hold-ings rarely exceed 3% of assets). He's willing tolet picks largely cluster within a few sectors, butthis hasn't resulted in undue volatility, and thefund has only lagged its typical peer in one calen-dar year during his tenure (2013's big rally).
Results versus the benchmark have been inconsist-ent on a calendar-year basis; the fund signific-antly lagged in 2009's and 2013's surges, virtuallymatched the index in 2010, 2011, and 2014, andmeaningfully outperformed the bogy in 2012, 2015,and 2016. Thus, some patience is required here,
which investors rushing into the fund in 2015should bear in mind. Also, Janus’ impending mer-ger with UK-based asset manager HendersonGroup creates some uncertainty. But it is unlikelythat management will tinker with this successfulfund.
Process Pillar: ∞ PositiveManagers Brian Demain and Cody Wheaton prefercompanies with recurring revenues, competitiveadvantages, and strong or improving returns on in-vested capital. The portfolio's average profitabilitymeasures typically land above the mid-growthMorningstar Category norm. The managers arewilling to pay up for durable growth at times; thus,valuations are typically at or above the categorynorm as well. They will also own, in far smallerquantities, opportunistic growth plays with rapid,more-volatile growth.
When it comes to firms' balance sheets, Demaindoesn't care as much about the absolute amountof their debt as the structure of that debt. Thefund's debt/capital ratio is often above average,though it was slightly below its typical peer's inSeptember 2016. He likes to see maturitiesstaggered in a prudent way, and he opts for com-panies that can generate more than enough cashto pay off their debt.
Valuation is also a factor: Demain performs dis-counted cash flow analysis on every stock and willsell on valuation concerns. A recent example is in-dustrial conglomerate Idex IEX.
The fund typically owns 70-80 stocks. Demain is apatient investor--portfolio turnover was 8% versus67% for its typical peer in the most recent fiscalyear. He typically scales new purchases up in sizein a gradual manner. The fund's appealing ap-proach earns a Positive for Process.
Manager Brian Demain's focus on steadier farehas resulted in a distinctive portfolio. The fund'sactive share versus its benchmark, the Russell MidCap Growth Index, was 85.5% at the end ofSeptember 2016.
There are no strict sector constraints here. Thefund's tech weighting has been significantly high-er than the category median (30% of assets versus20% at the end of September), and its industrialand healthcare stakes have typically been higher,too. Within tech, Demain has found a wealth offirms with strong balance sheets and solid growthprospects. The fund's top holdings in the sector in-clude several that Morningstar's equity analystsbelieve have economic moats, including scientificinstrument maker Sensata Technologies ST andtelecom software maker Amdocs DOX.
Consumer defensive and consumer cyclical firms,meanwhile, have been big underweightings in thefund relative to its peers. Demain finds fewer dur-able growth companies in those sectors withinmid-caps with the exception of a few mainline re-tailers at times.
The fund has grown rapidly of late, but Demainshould retain the flexibility to continue construct-ing distinctive portfolios. He manages $13 billionbetween this fund, Janus Aspen EnterpriseJAAGX, and similar separate accounts. His pa-tient style makes that amount manageable, andthe fund is slated to close to new investors on Jan.27, 2017.
Performance Pillar: ∞ PositiveIt took one bad year to make this fund look some-what ordinary over the longer haul, but strongshowings in 2015 and 2016 have boosted its re-cord.
This fund rarely blew away its rivals from whenBrian Demain took the helm in November 2007through 2012. Although it outperformed its typicalpeer each calendar year from 2008-12, the fund'smargin of victory was often narrow, and a relat-ively weak 2013 erased much of its edge. In 2014,the fund surpassed 88% of its mid-growth peersand matched its Russell Midcap Growth bench-mark. In 2015, the fund beat most rivals and solidlyoutpaced the index because of winning picks suchas medical diagnostics firm Boston Scientific BSXand Constellation Software CSU. Through Novem-ber 2016, the fund surpassed the index and the
category by large margins for the year to date be-cause of picks such as broker TD AmeritradeAMTD, Ritchie Bros. Auctioneers RBA, and bi-otech firm Medivation, which was acquired by Pf-izer.
During Demain's full tenure through November2016, the fund beat 80% of peers and the bench-mark on both a total-return and risk-adjusted basis(as measured by Sortino and Sharpe ratios). Thefund typically gains an edge on its peers and theindex when times are tough. It has captured 91%of the downside of the Russell Midcap Growth and88% of the losses of its typical peer when stocksfall. All told, it earns a Positive rating for Perform-ance.
People Pillar: ∞ PositiveBrian Demain, the fund's assistant manager sincelate 2004, took the reins here in November 2007after Jonathan Coleman moved over to lead thefirm's flagship Janus Fund JANSX. (He took overthe similarly managed Janus Aspen EnterpriseJAAGX at the same time.) Demain started as ananalyst at Janus in 1999 and became the commu-nications sector team's leader in 2004.
Demain works with the firm's team of small/mid-cap analysts for roughly 60% to two thirds of thefund's holdings. That team includes CodyWheaton, who was named an assistant managerhere in January 2014 and comanager in July 2016.Wheaton still spends time as an analyst coveringconsumer and financials stocks. The team in-cludes five other analysts.
The analysts support just three funds--this one andsmall-growth funds Janus Venture JAVTX andJanus Triton JATTX. The latter two funds boastedstrong records under Chad Meade and BrianSchaub, who left the firm in May 2013 to join oth-er former Janus personnel at Arrowpoint Partners.One veteran member of this team, Janus Venturecomanager Maneesh Modi, jumped to Arrowpointin early 2015 to back the departed duo.
The rest of the fund's holdings are covered by thefirm's large-cap team. Here, Demain works most
closely with the tech and healthcare teams, as thefund typically has an overweighting in both thosesectors--particularly tech. The fund earns a Posit-ive rating for People.
Parent Pillar: ¶ NeutralIn October 2016, Janus announced it would mergewith Henderson Group, a U.K.-based money man-ager with a strong presence in Europe (whichJanus lacks) and a low profile in the United States.The merger, slated to close in 2017's secondquarter, could benefit both firms through in-creased distribution and provides more scale in theface of intense competition from firms with assetsin lower-cost, passive investment vehicles, whichhave been popular among investors. The firms'CEOs are expected to be co-leaders, at least ini-tially, and Enrique Chang, Janus' head of invest-ments, will have that title for the combined firm.
There are positives, but a culture that doesn'tstand out, along with the uncertainty created bythe announced merger, yields a Neutral rating. Thefirm has suffered bouts of manager turnoveramong its equity funds during the past 20 years,including the recent retirement of Janus Overseas'Brent Lynn. The bottom-up fixed-income teamsuffered a loss when leader Gibson Smith depar-ted at the end of March 2016 for personal reasons.
Chang has made moves that should mean a morestable equity team. Janus subsidiaries Perkins andINTECH remain solid outfits. We continue to mon-itor the firm's ability to attract and retain invest-ment talent. A previous version of this report dis-played an incorrect Parent rating.
Price Pillar: ∞ PositiveThis fund has done a good job of sharing econom-ies of scale with shareholders across shareclasses. The fund's T shares hold 31% of the as-sets, charge 0.93%, and earn a Morningstar LeeLevel of Below Average. The I shares hold 26% ofthe assets, charge 0.78%, and also earn a BelowAverage. The N shares hold 18% of the assets,charge 0.68%, and earn a Low.
And the D shares hold 13% of the assets, charge0.84%, and earn a Below Average.
The fund's other four share classes hold the re-maining 14% of its assets and earn a Below Aver-age fee level, on average. Overall, the fund earns aPositive rating for Price.
