Hodges Capital boss blasts re-categorization by Morningstar

Hodges Capital Management Inc. is considering appealing a recent decision by Morningstar Inc., which it says miscategorized one of its funds, causing the firm to suffer tens of millions of dollars in outflows, according to its chairman, Don Hodges.

“We were considering legal action but really don’t want to get into it with lawyers and all of that,” he said. “But we are frustrated because they have never liked us, and they arbitrarily have moved us to a category that doesn’t make sense.”

On May 31, Morningstar re-categorized the firm’s Hodges Fund (HDPMX) from the mid-cap-growth category to the mid-cap-blend category. As a result, the fund’s 10-year performance dropped from the top 30% in its category to the top 57%, according to Morningstar.

The annualized 10-year return for the mid-cap-blend category was 3.73% as of Sept. 28, compared with the annualized 10-year return of 0.05% for the growth category. The 10-year return for the Hodges Fund was 3.48%, according to Morningstar.

For a while, the fund was rated in the 83rd percentile when ranked against its peers, causing the firm to lose millions of dollars, Mr. Hodges said.

“It has hurt us dramatically,” he said. “Advisers consider [Morningstar] the Bible.”

Since May 31, the $310 million Hodges fund has seen $83 million in outflows, according to Morningstar. Hodges Capital Management has $350 million in mutual fund assets.

Specifically, Mr. Hodges worries that because Morningstar doesn’t have an “all-cap” style box, the fund was placed in the wrong category.

“It seems like they have their own little world, and if you don’t fit into it, then that’s tough,” he said.

Morningstar reviews all its funds every six months to make sure that they still are in the appropriate category, said Michael Breen, associated director of fund research. Morningstar in May found that the Hodges Fund, which is a multicap fund, had more of a value bent, thus making it more appropriate for the multiblend category, he said.

“The manager can appeal anytime they want,” Mr. Breen said. “We like to talk to the managers because they are going to provide insight that we might not have by looking at the data.”

Morningstar alerts the funds one month before the change is made to allow it to appeal before making the change. Hodges Capital was notified of the change but decided not to protest it.

“We didn’t really pay a lot of attention to it because we didn’t — and still don’t — understand why we have been put in this category,” Mr. Hodges said.

E-mail Jessica Toonkel at [email protected].