Morningstar Magazine - June/July 2017 - 97

features here. Baird Aggregate Bond BAGIX was
showcased in the Winter 2008 issue and
Baird Core Plus Bond BCOIX in August/September
2015. The funds both have Silver ratings today, and
the team was nominated for Morningstar
Fixed-Income Fund Manager of the Year for 2016.
In this past issue's Morningstar Conversation,
Baird manager Mary Ellen Stanek discussed the
importance of maintaining a diverse team to foster
stronger decision-making.
All told, 47 funds have been rated a Morningstar
Medalist or beaten their category average, or both,
since first being featured; they are showcased in
EXHIBIT 1. Our international picks did particularly
well; almost all made the list.
Meridian Growth Legacy MERDX, from October/
November 2013, was a gratifying success. We
profiled that fund, along with Meridian Contrarian
Legacy MVALX, not because it was outstanding
at the time but because it was in the midst
of a promising transition. The funds had foundered
upon the death of Rick Aster in 2012-that's
when Kevin O'Boyle stepped in-and
their parent firm was purchased by what is now
ArrowMark Partners, founded by well-regarded
Janus alumnus David Corkins. Chad Meade
and Brian Schaub, also originally from Janus, took
over the Growth fund.
Lessons Learned
Meridian Growth's happy ending was not a given.
One lesson to be drawn from our fund universe is
to beware of funds whose success hinges
on one player. That creates key-man risk, as played
out dramatically in the case of the Meridian
funds and was also seen in Keeley Small Cap Value
KSCVX, from Winter 2008. While the firm
eventually put a succession plan in place before
the 2015 death of founder and portfolio
manager John Keeley, the fund lost its bearings
during the transition.

Jeff Auxier of Auxier Focus AUXFX, featured in
April/May 2009, is something of a gentleman
farmer/investor: He manages money from his
hazelnut farm outside of Portland, Ore. The risk in
going solo is lacking sufficient research resources
to support a growing asset base. However,
Auxier takes a very low-turnover approach, limits

position size, and is willing to hold cash when
valuations are high, and has no apparent interest
in maximizing assets under management. Citing
Warren Buffett ("The first rule of investing is don't
lose money..."), Auxier emphasized that protecting
principal was his priority. The large-value fund has
continued to deliver limited losses with OK
returns. That said, the key-man risk is considerable.
Similarly, managers who run high-conviction
strategies make for attractive profiles but are
also riskier propositions. Take Beck, Mack & Oliver
Partners BMPEX from October/November 2011.
Former manager Zac Wydra was also willing to
hold cash rather than compromise his value
parameters, and he also quoted Buffett. (We may
have to examine our bias toward Buffett-quoting
mavericks.) On top of that, he was backed by a
team-based decision-making process at a
low-turnover partnership that brought to mind the
strengths that make Mairs & Power such a
reliable shop. And yet his concentrated portfolio
of sometimes controversial names underperformed
in up markets and down. (Wydra left the
fund in late 2015.) The fund is perhaps our biggest
disappointment: Its roughly 6% annualized
return from late 2011 through mid-April was less
than half that of the typical large-blend fund.
GoodHaven GOODX, featured in February/March
2012, is a similar cautionary tale. The young
fund received an Analyst Rating earlier than most
because of its promise. It started at Neutral
because it was brand new, but we were
optimistic: Portfolio managers Keith Trauner and
Larry Pitkowsky had an attractive pedigree as
comanagers and consultants at Bruce Berkowitz's
Fairholme FAIRX during a very strong run.
They shared Berkowitz's concentrated, contrarian
approach, and were highly invested in the new
fund, and the fund was upgraded to Bronze
in 2013. Unfortunately, the other shoe dropped
later that year. As the risks of the approach
became all too apparent, shareholders fled, and
the fund has been dropped from analyst coverage.
Concentration is indeed a double-edged sword,
and Sequoia SEQUX turned out to be a surprising
example of that. We featured the celebrated
fund in Summer 2008 when it reopened after being
closed for a quarter of a century, giving new

shareholders a chance to invest with methodical
stock-pickers with a long record of success. Bob
Goldfarb and David Poppe went on to win
Morningstar Domestic-Stock Fund Manager of the
Year for 2010, and the fund's performance over
the nine years since we picked it has been decent
overall. But an oversized bet on Valeant
Pharmaceuticals VRX felled the fund in late 2015
and led to lead manager Goldfarb's retirement.
The fund still has a Bronze rating, indicating
Morningstar analysts' continued confidence in the
strategy and the rest of the investment team,
but it is no longer an easy recommendation.
Looking Ahead
The funds featured here over the past decade have
spanned the spectrum of Morningstar Categories:
While about half fall into one of the domestic
equity style-box categories (large growth, small
value, etc.), we've featured international
stock and bond funds, including those dedicated
to emerging markets, multisector, and high-yield
bonds. We also profiled two alternative strategies,
Bronze-rated AC Alternatives Market Neutral
Value ACVVX and Marketfield MFLDX, which hasn't
played out as well. (For more on the latter, see
"The Marketfield Saga" on Page 79.)

We gave much more space to certain categories,
though. For example, we've covered a number of
large- and small-cap domestic stock funds,
but only a handful of mid-cap offerings. Those
funds are worth exploring-proponents
argue they have more growth potential than large
caps with less uncertainty than small caps-
and we'll include more in the future. We'll seek out
more fixed-income managers, too: Morningstar
research suggests active bond managers are
more likely to beat benchmarks than active stock
managers, so we'll be looking for opportunities
there. Strategic-beta exchange-traded funds are
also ripe for coverage.
Going forward, we'll be mindful of the results
of this retrospective. We'll be skeptical and
make certain to point out the risks of aggressive
or unique strategies-but we won't shy away
from sharing promising picks, even if they don't
come with a guarantee. K
Laura Lallos is the managing editor of Morningstar magazine.

global.morningstar.com/Morningstarmagazine

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Contents
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