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Fund Spy

Another Quarter of Gains for the U.S. Equity Market

Value drives U.S. equity market gains in the first quarter.

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U.S. equity markets finished up in 2021’s first quarter but not without some bumps. The Morningstar US Market Index rose 6.0% for the year through March, with value leading the way for a change. The Morningstar US Small, Mid, and Large Value indexes gained 20.8%, 16.5%, and 9.3%, respectively, through March 31. Growth stocks across the market-cap spectrum, on the other hand, posted losses for the period. High-flying large-growth companies from 2020 faced challenges. Zoom Video Communications (ZM), ServiceNow (NOW), Tesla (TSLA), and MercadoLibre (MELI) each fell in the first quarter, though they still sit miles ahead of their prepandemic levels.

The year had a volatile start. The Morningstar US Market Index fell in January as titans gave back 2020 gains. A social-media-fueled frenzy launched GameStop (GME) from about $17 on Jan. 5 to a $348 Jan. 28 peak, squeezing professional investors who had been shorting the moribund retailer. Then good vaccine news, dovish interest-rate signals from Federal Reserve chairman Jerome Powell, and positive economic news lifted stocks for the rest of the quarter.

The best- and worst-performing sectors in 2020 flipped in the first three months of 2021. After leading the market in 2020, technology firms stalled, gaining just 1.5% in the first quarter. Apple (AAPL), Qualcomm (QCOM), and Advanced Micro Devices (AMD) each posted steep losses and were among the sector’s greatest detractors. Energy stocks rose 31.0%. Big integrated firms such as Exxon Mobil (XOM) and Chevron (CVX) fared best, helping deep-value strategies with large energy allocations, such as Hotchkis & Wiley Mid Cap Value (HWMIX).

Standouts

Invesco Comstock (ACSTX)
After a difficult year for deep value, Invesco Comstock got a boost. The strategy, which has a Morningstar Analyst Rating of Silver, rose 16.9% in 2021’s first quarter, topping the Russell 1000 Value Index’s 11.3% and outpacing 93% of large-value Morningstar Category peers. This experienced team looks for stocks with strong management teams that are poised for growth, trading at attractive valuations, and unafraid to cluster picks in out-of-favor areas. Its willingness to go against the grain has led it to the energy sector in recent years. Its 9.2% stake in the sector--more than double that of the bogy--as of December 2020 benefited the strategy in the first quarter, as did financials picks, such as Bank of America (BAC) and Fifth Third Bancorp (FITB).

Fidelity Large Cap Stock (FLCSX
)
Bronze-rated Fidelity Large Cap Stock also turned things around. After trailing 88% of large-blend Morningstar Category peers in 2020, the strategy’s 12.1% gain beat 95% of peers in the first three months of the 2021. Talented manager Matt Fruhan has a value tilt and tendency to embrace unloved or challenged companies, and this paid off. A big energy overweight and financials and consumer discretionary picks, such as Wells Fargo (WFC) and General Motors (GM), rewarded fundholders.

Strikeouts

Brown Capital Management Small Company (BCSIX)
The long-term record of Gold-rated Brown Capital Management Small Company is topnotch, but its 6.1% loss in 2021’s first quarter trailed 99% of small-growth Morningstar Category peers. Lead manager Keith Lee and his team of six dedicated managers seek companies with operating revenue of $250 million or less that save time, lives, money, or headaches. That has meant big helpings of healthcare and technology, two of the small-cap growth market’s worst-performing sectors in the first quarter. Healthcare equipment firm iRhythm Technologies (IRTC) and self-service data analytics company Alteryx Technologies (AYX) were among the strategy’s worst-performing holdings in the first quarter. The fund’s long-term record remains strong, though, and its experienced team’s patience and consistency should continue to reward fundholders.

Harbor Capital Appreciation (HACAX)
Gold-rated Harbor Capital Appreciation struggled in the first quarter; its 3.4% loss ranked in the bottom decile of large-growth Morningstar Category peers. The strategy’s deep and collaborative investment team looks for industry leaders that can grow faster than the market expects. The portfolio’s technology, consumer discretionary, and healthcare holdings struggled. Stocks that propelled returns in 2020, such as Coupa Software (COUP), Peloton (PTON), and Match Group (MTCH), were among the strategy’s largest detractors in the first quarter as investors piled into more cyclical sectors. Its long-term record is still attractive.

Claire Butz has a position in the following securities mentioned above: AAPL. Find out about Morningstar’s editorial policies.