Morningstar Magazine - February/March 2014 - (Page 67)

35000 the fund's size last year to a current $670 million, it has largely gone unnoticed by most investing circles since it was launched in 2001. One explanation is that like the companies the fund prefers to buy it is located in a part of the country that is far from mutual fund hubs like New York or Boston. A more plausible explanation, though, could be the fund's parent structure. Hancock Horizon HBHC is a parent company that operates retail branches throughout the Southeastern United States. In general, banks don't have a reputation for managing top-tier mutual fund lineups. Indeed, these funds can languish unless pushed by salespeople in retail branches or private client offices. In turn, fees can be high, which means they have a hard time competing for assets with the likes of Vanguard and T. Rowe Price TRP in crowded categories such as large caps (which is why several successful bank-run funds are in small-cap categories, where it is easier to differentiate an offering.) What may also keep investors away from bank-run funds is a concern that a fund complex housed within a financial institution could be put under pressure to help the parent make its earnings if other parts of the company underperform. The leaders of the fund complex could, in turn, decide to raise fees (or not lower them at an appropriate time) or launch trendy funds in an effort to attract assets. While both points can lead to more money in the bank's pocket, they don't build a solid foundation for a fund company that has shareholders in mind. That's not to say all bank-run fund lineups are painted with the same brush. While the fund complex at JPMorgan Chase JPM must deal with the troubles stemming from other parts of the company, there are plenty of examples of well-run mutual funds tucked away within banks. And there are also examples of those same mutual fund lineups being successful when they decide to go it alone. Victory Funds was spun out of KeyCorp KEY last year. Foundry Partners, a manager of separate accounts, was the former asset management arm of Fifth Third Bancorp FITB. Below, we highlight three funds including the Hancock Horizon offering that have posted solid results and feature strong managers and reasonable fees-and all call their parent firms a financial institution. David Lundgren Combing the Gulf Coast Portwood and Lundgren are used to working within the confines of a bank. In the late 1990s their employer was bought by Bank One (which was eventually swallowed up by J.P. Morgan). Instead of going to work at Bank One, which would have required them to move to Columbus, Ohio, the pair decided to start from scratch at Hancock Horizon. At the turn of the century, the firm's fund lineup consisted of traditional offerings-large-value and core-bond offerings. To expand, they toyed with the idea of a small-cap fund that would 20000 specialize in Mississippi-based firms and those in neighboring Louisiana. But the universe of companies consisted mostly of energy firms. 5000 "We were concerned about the risk," Lundgren says. "We didn't want the fund to be correlated to the price of oil." Eventually, the mandate for Hancock Horizon Burkenroad Small Cap was broadened to include Georgia, Alabama and, more importantly, Texas and Florida, which expanded the types of holdings that could make their way into the portfolio. Lundgren and Portwood narrow the universe of companies in that geographic region down with a combination of quantitative screens and fundamental research. The screens are centered on three areas: momentum, valuation, and earnings. While the managers don't reveal the exact composition of the algorithms, they do say they are looking at traditional metrics such as price/earnings, relative strength, earnings surprises, and historical stock data. (The valuation screen is typically weighted more heavily in their decision-making process.) The duo will conduct fundamental analysis to catch any factors the screens miss-a CEO resigning, for example-and they also use John Portwood Hancock Horizon Burkenroad Small Cap HHBUX $35K 20 Russell 2000 TR USD 01/ 04 01/ 07 01/ 10 01/ 13 Category Small Blend Expense Ratio (%) 1.4 Morningstar Rating QQQQQ 5-Yr Annl Total Rtn (%) 22.86 Minimum Investment $1,000 5-Yr Total Rtn % Rank Cat 15 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 Data as of Dec. 31, 2013 third-party research as a double-check. For example, the fund's name stems from Tulane University's Burkenroad Reports stock-picking program, where students publish analysis of small-cap stocks that are in the same region. The managers don't pay for the research, which is available on the program's website. However, they do pay a licensing fee for use of the name. (The managers don't have a say in how that fee is spent at the school.) The fund gained a strong 39.8% in 2013, which landed it in the top third of the small blend category. That return was largely the result of holdings such as appliance chain Conn's CONN, casino game-maker Multimedia Games global.morningstar.com/Morningstarmagazine 67 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014