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Eggs and Fund categories

edited November 2013 in Fund Discussions
A few minutes of rambling, away from the other madnesses of daily living.

The fund category question will never go away; as there are not enough categories to place against many fund styles. One must accept that on a given day, a fund birth may have had a clear category. If a fully fledged value fund starts life as such, and there is no growth in the individual holdings; is the fund still a value fund after one year? Seems to be the case. But, if one-half of the holdings grow 30% in value, is the fund now a value, kinda growth fund or a blended fund? I can't answer that question in total.

One may start will an raw egg fund, but how it evolves may not allow for a strict placement into a category, into the future. Some of the eggs will be fried sunny side up, over easy or hard. They may be poached lightly or more hard. They may be boiled in the shell, to be eaten as such; but these same eggs may also become deviled. This does not even begin to imagine what is done with eggs in all forms, when combined with other food stuffs. Similar is the nature of some funds, as they evolve.

FLPSX is a nice example. It is either a mid blend or value, supposedly. The turnover is very small and the overall posture of the fund remains intact over many years. But the following applies to this fund:

---Mega cap = 11%
---Very large cap = 4%
---Large cap = 21%
---Mid cap = 36%
---Sm cap = 28%

---U.S. equity = 67%
---Foreign equity = 33%, of which 5% is emerging markets

The name, low priced stock, implies value; but one must suspect some of what where value holdings are now growthy.

How would you define FLPSX as to a category?

'Course, one may apply this category problem to any number of multi-sector or unconstrained bond funds, too.

And what about those index etf's? They are grouped together in many cases, but even the total market funds are not all clones of one another. Is one market cap weighted or should it not just be a plain and even split among large, mid and small caps?


bilvihur posed this question. MFO link

M* categories

Ok. I'm done. I have a wall to tear down.

Take care,
Catch

Comments

  • edited November 2013
    Hi Catch,

    It depends on how long it's looked like that. "Category" and "investment style" are two different things in M*'s lexicon, and I think that's a useful distinction. I remember from the reclassification of ARTKX's category a few years back (from foreign small-mid value to foreign large blend) that investment style is based on year-to-year positioning, and category is based on 3+ years of positioning (or the prospectus, if it's a new fund). After 3 years of going large and blendy in investment style, M* changed the category.

    If the style details graphic on this M* portfolio page is accurate, FLPSX looks like a global multi-cap value fund to me now (investment style). Category? Depends on the holdings going back a few years, and the M* page isn't detailed enough to tell that.

    M* doesn't do multi-cap, which to me is one of the biggest problems with their classifications ... lumping funds that are really across the board on capitalization with mid-cap funds because the cap breakdown of the former averages out at mid-cap. FWIW, Lipper recognizes multi-cap and does other finer tuning of categories.

    Cheers,
    AJ

  • You're right. 5000 active funds might well require 5000 boxes to ensure a great fit. I wonder if a compromise is to add another (I know, I know) bit of information: quality of fit. Morningstar calculates (but does not always publish) R-squared values that measure the degree of fit between a fund and a category.

    I wonder if there are valid statistical grounds for saying that, for funds with an R-squared above 90, the category is a good fit. For funds from 80-89, the category is a fair fit. For funds below 80, the category is a poor fit? The numbers here are just illustrative, since I barely escaped Stats alive.

    So: for Fidelity Low-Priced Stock, they might report: "FLPSX is judged as a mid-cap blend fund. There is only a fair match between the fund and this category" or "RPHYX is judged as a high yield bond fund. There is a poor fit between the fund and this category."

    The FLPSX peer groups are, by the way, Mid-Cap Blend for performance, Mid-Cap No Load for fees and expenses, and Lifetime Moderate 2040 for MPT stats. Nuts.

    Ah pity da wall that crosses Catch.

    David
  • Catch22:" A rose by any other name is still a rose." Joel Tillinghast is a great fund manager, and FLPSX is a superior fund.
    Ted
  • Ted,
    Absolute, Ted. FLPSX is a great fund. I used it for the example as to attempting to place such a fund into a defined category and/or investing style.

    Regards,
    Catch
  • We are seeing more and more of these "idea" funds that invest in all and everything or use a lifestyle or a unique strategy as their investing mission. I'll bet this has everyone at M* scratching their heads.
  • Until the late 90s, M* classified funds according to their stated "investment objectives" - aggressive growth, growth (no focus on dividends), growth and income (secondary emphasis on income), equity income (primary focus on income, growth secondary), small company, etc. (Hard to find a complete list of M*'s old methodology).

    They changed their methodology, as I recall, in recognition that funds were narrowing the pools in which they "fished", leading to classification by style box.

    These seem to be two ends of a spectrum. Funds that are more "old school", as I tend to think of FLPSX, are wide ranging, and are better characterized by what they look for in a security as opposed to the size of the company or a static snapshot of the company's financials (P/E, P/B, etc. - growth vs. value). Funds that are "style pure" are handled better by M*'s current methodology.

    M* made another change at the time - they started looking at what funds really invested in, as opposed to what they said they were investing in. For the most part, this was an improvement. Funds might say that the world was their oyster, but might only buy blue chips. It would make more sense to compare such a fund with the S&P 500 than with FLPSX or some (other) global multi-cap fund. But if a fund has that sort of flexibility, and uses it, even it it takes years to rotate out of one part of the market into another, it might be better to compare it with global funds, even if it were currently all domestic.

    Classifying anything is an extremely difficult task. I recall reading several years ago that it took medical experts ten years to come up with a good classification system for bones in the arm. There always seem to be competing objectives, and no classification system seems to work completely.

    Aside from RPHYX, issues I have with bond fund classifications include:

    BCHYX - Am Century Calif. HY - this demonstrates the opposite problem - it is a junk bond fund thrown in with California long term (investment grade), while it might be better matched to national HY. (RPHYX is thrown in with junk bonds, while it might better match short term investment grade, since its duration attribute seems to dominate).

    Total return funds - these are the bond world's equivalent of "multi-cap", but they get thrown in with intermediate term bonds.

    Core plus funds - a subset of total return funds; these funds include junk as well as investment grade bonds.

    BCHYX, like RPHYX, doesn't really have enough peers to be put into a separate category. But total return and core plus funds likely do.
  • edited November 2013
    Tend to agree with everything said here. You'll never stop people from trying to categorize funds - though I consider it in some measure a fool's errand. I really think there's enough information out there, especially in the annual and semi-annual reports, to make informed decisions. Take the M* classifications and ratings for what they are - or, more accurately, are not. I don't mean to demean the value of M*, Lipper, MaxFunds, or any of the others. The charts & stats, along with their own empirical observations are invaluable tools. Just don't let that substitute for your own thinking.

    Many will recall a period 10-15 years ago when a number if typically "growth" stocks like Microsoft had become so undervalued that some "value" managers (mine among them) were snatching them up. Didn't bother me one bit ... because a good manager is a good manager is a ....:-)
  • As several have noted, the manager is the most important aspect of selecting an actively-managed fund. Categories, schmategories. I have talked with and written to M* about this, and have given up. The reasons they give for some of the 'round peg in a square hole' decisions they make are absurd sometimes. My advice is to limit the importance you place on style boxes. Yes, you want some diversification, and that is easy to see from fund holdings and other statistics. But just don't get hung up over filling style boxes and/or categories. And be sure funds you are comparing for consideration are at least remotely similar. I'll stop my rant now.
  • Yup. I try my best to diversify through management style. Market Cap weighting is probably the last thing on my list.
  • edited November 2013
    "Be sure funds you are comparing for consideration are at least remotely similar." That's the issue in a nutshell! But how? In what way? I used to think Lipper, Morningstar, and even MFO were doing that for me, but maybe not. As far as management style - they ALL say they're going to make money for their investors, right? Do any say they're going to lose your money? The managers that are truly great move on to other funds. Then what? Are there any lists of funds in which the manager has his/her entire life savings invested? That's where I want to be!
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