Russel Kinnel from M* applies strict screens to narrow down the mutual fund universe to 25 - 50 funds.
Mr. Kinnel's screens are:
• Expense ratio in the Morningstar Category’s cheapest quintile
• Manager investment of more than $1 million in the fund
• Morningstar Risk rating lower than High
• Morningstar Medalist Rating of Bronze or higher
• Parent Pillar rating better than Average
• Returns greater than the fund’s category benchmark over the manager’s tenure for a minimum of five years
• Must be accessible to individual investors with a minimum investment no greater than $50,000
• No funds of funds
• Funds must be rated by Morningstar analysts
Six funds were added this year while two funds were removed.
Vanguard [8], American Funds [7], Fidelity [6], Dodge & Cox [5], and Baird [5] dominate the list.
https://www.morningstar.com/funds/thrilling-36-2
Comments
The fund's expense ratio would need to be below 0.50% (cheapest fee quintile) to be eligible for inclusion.
Mentioned in the 2020 "Thrilling 36" exercise:
"T. Rowe Price Capital Appreciation PRWCX actually wasn't on the list
last time, either, but because I always get a lot of questions about it:
The fund missed the expense ratio screen by 4 basis points.
Don't worry, we still rate it Gold."
Mr. Kinnel made a point that he was screening share classes: "strict screens to narrow a universe of 15,000 fund share classes down to a short list ranging between 25 and 50. It’s purely a screen; I don’t make any additions or subtractions. "
Why was VPMAX subtracted out?
Ignoring these minor glitches, the real problem is with the requirement that the funds must be 100% covered by analysts. IOW, only the usual suspects.
The Admiral share class appears to pass all of Kinnel's screens.
The "funds must be rated by M* analysts" screen is problematic
since it excludes excellent funds which are not reviewed qualitatively by M*.
BTW - What does he have against “funds of funds”? (ISTM some here have also frowned on the concept.) I’d say it depends on how deep and successful the available arsenal of funds is, the history, resources, and integrity of the firm making the allocation calls and - very importantly - fees..
Although fees really do matter, I would not hesitate to own PRWCX if it was a good fit for my portfolio.
Mentioned in the 2018 "28 Terrific Funds" article:
"No funds of funds. The screens just won’t work as well with this type."
The screens used in the 2018 exercise were the same except for two minor differences:
Parent rating of Positive then vs. Parent Pillar better than average now
Minimum investment $25K or less then vs. $50K or less now
I made a previous comment that I personally wouldn't use a 'fund of funds'; based upon forced choices of investment sectors that I wouldn't choose myself.
No unlike the SP500 and its 11 sectors, there are many investors who choose equity sectors they favor, versus the 11 sectors of the SP500. The same can be noted for the bond sectors of the markets.
One supposes that an individual investing in equity and/or bond sectors creates their own 'fund of funds' portfolio.
At least this is our view for our portfolio; which is currently a 40/60 portfolio when all the pieces are counted.
Remain curious,
Catch
I do recall you demurring on the subject and I think your reasoning makes perfect sense. In my 10 portfolio positions I have only 1 fund of funds. No particular reason. Sometimes fees are more attractive, perhaps because the firm finds it more efficient to administer such a fund held by individuals in larger amounts rather than having you or I owning smaller quantities of half a dozen of their funds. But I don’t think you are an exception. Very little is said here, ISTM, about funds of funds. I take that to mean folks by and large agree with your rational Currently I’m 45 / 45 / 10 (other)
My favorite is down rating a fund ( I forgot which one) for "high manager turnover " when one of the managers died
Nor have I ever understood their obsession with fees. This guarantees massive funds. Do you really care if a fund charges an above average fee if the track record is excellent?
Why include closed funds?
MFO lists are much better and looking at meaningful criteria. Example: look for Great Owl Funds .
True, and that's what disqualifies most funds from the list.
"Funds must be rated by Morningstar analysts". That's human beings, not machines. If you're making a broader statement, that analysts rely on numbers that machines generate, what would be better? 100% touchy-feely analyses?
I spot checked a few of the funds: MERDX, RPMGX, BUBIX, SIGIX, POAGX. Admittedly not a huge sample, but every one of them has a rating that is 100% analyst-driven.
This is why I wrote: "the real problem is with the requirement that the funds must be 100% covered by analysts. " It's not so much fees that guarantees massive funds; it's analyst coverage. M* assigns analysts almost exclusively to the most popular (largest) funds. Though one can sometimes find an oddball or two, such as MERDX ($1.1B AUM).
Kinnel wrote: "purely a screen; I don’t make any additions or subtractions." He says these are "simple, strict screens." Either one can access a particular share class or one can't.
The hoops one must jump through don't render a share class inaccessible. The only exception he makes to strict adherence to his rules is that he excludes actively managed funds costing under 10 basis points if you must pay a fee to access them.
Put another way, you might have to pay a small ransom to use a platform necessary to access a share class costing 20 basis points. But that doesn't matter. All that matters are those 20 basis points, not the total cost of access.
Likewise, the fact that you might have to have a small fortune in other funds in order to invest a "mere" $50K in a share class doesn't matter. All that matters is that $50K minimum, not the total size of your portfolio.
Parlez-vous un peu Francais?
I have not used M* screener in years. I could not maneuver the screener (under tools) in the new M* site. If anyone has a path to Kinnel's screen, please share.
I admit to not reading the rest of the thread.
https://en.wikipedia.org/wiki/Sacrebleu
M* does have a free trial offer for Morningstar Direct.
I'm not familiar with the offer's terms and conditions.
https://www.morningstar.com/business/brands/data-analytics/products/direct