Morningstar: Go For The Gold

Funds & Featured Portfolios, by Mark Robertson, Managing Partner April 1st, 2016

It’s been nearly five years since Morningstar launched the medalist designations for mutual funds. This month, we cull the gold medal funds that also have a 5-star rating seeking long-term leaders.

It’s been nearly five years since Morningstar launched the medalist designations for mutual funds. The intent is to maintain a long term perspective and identify top tier investment opportunities. Morningstar Medalists are funds that have been assigned a Morningstar Analyst Rating of Bronze, Silver, or Gold, meaning that those are the funds that we think are likely to outperform their category peer groups and appropriate benchmarks on a risk-adjusted basis over market cycles of at least five years. This month, we cull the gold medal funds that also have a 5-star rating seeking long-term leaders, candidates for fund investors and as always, potential sources of actionable and investable stock opportunities.

PRIMECAP Odyssey Aggressive Growth (POAGX): Long-Term Performance. This actively managed fund has beaten the market by 4.5% (percentage points) over the trailing 10 years. The fund has achieved an absolute total return (annualized) of 11.4% during a period when the Wilshire 5000 advanced 6.9%. Although closed to new investors, as always, this type of outperformance may provide some study candidates. The fund appears to select carefully and has very low turnover.

Winner: PRIMECAP Agg Growth (POAGX)

The PRIMECAP Odyssey Aggressive Growth Fund has beaten the total stock market benchmark (Wilshire 5000) by +4.5% annualized over the trailing ten years. The absolute return has been 11.4% — clearly top tier performance as the fund has beaten the benchmark in 9-of-the-last-11 years.

Portfolio turnover is 15%. It doesn’t get much lower than that for an equity fund specializing in smaller companies and deeper value situations. The fund managers act with conviction after considerable diligence that attempts to identify companies with differentiated potential that exceeds Wall Street expectations.

The expense ratio is 0.62%, also an attractively low burden for fund investors and compares well to similar funds. But the fund is closed to new investors at the present — so it becomes a proving ground and source of stock study ideas because the fund managers are excruciatingly selective and any recent additions (or sales) from the portfolio is probably worth a closer look and further study.

$100 invested on 12/31/2004 had blossomed to $360.40 on 12/31/2015. For comparison, $100 invested in a Total Stock Market Index (VTSMX) was worth $217.10 on 12/31/2015. This is a rather dramatic reminder of the power of a 3-5% relative return over a period as short as ten years.

The fund’s largest holdings include: Abiomed (ABMD), Qiagen (QGEN), Sony (SNE), Seattle Genetics (SGEN), Royal Caribbean Cruiselines (RCL) and Nektar Therapeutics (NKTR). But more importantly, added during the 12/31/2015 update were new positions in Ruckus Wireless (RKUS), Hewlett Packard Enterprise (HPE) and Alphabet/Google (GOOG). Ruckus and HPE have advanced fairly dramatically but GOOG is still relatively near the 4Q2015 price levels. We’ll watch the 3/2016 update for potential ideas.

Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.