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The Year in Funds So Far

The funds that prospered last year now find themselves on a back foot, while last year's stragglers have recovered along with the economy.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. We're halfway through 2021. Joining me today to talk about fund performance and fund flows during the first half of the year is Russ Kinnel. Russ is Morningstar's director of Manager Research and editor of Morningstar FundInvestor.

Hey, Russ, thanks for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: So let's start out by talking a little bit about performance for the year to date. What fund categories have done especially well during the first half? And what's been driving that performance?

Kinnel: Yeah, energy has been doing really well, small value, real estate, financials… All the areas that were terrible to be in, in the COVID sell-off in the first quarter of 2020, have been the best places this year. And it's really the reverse, right? People are being vaccinated. The economy is surging back. A lot of those areas were really economically sensitive, and so now with the economy coming back, those areas have rebounded from what were very cheap levels. So there's a logic to that.

Dziubinski: Then let's look at the flip side: What fund categories have underperformed and why?

Kinnel: Yeah, long government, long bond, world bond, and precious metals have all lost money so far this year. And again, it's sort of the flip side that long bonds are a great place to be when the economy slows down, especially if it's high-quality, like government. So now we're kind of going reverse. So there's the threat of rising rates, possibly rising inflation. So that scares off long government as well. And then precious metals, I think, is always a wild card, but I think maybe that things staying relatively stable is probably not good for precious metals.

Dziubinski: Let's talk a little bit about a few specific fund surprises this year. In general, you know, value funds have done quite well this year. But there are a couple of value funds that have done exceptionally well relative to their peers.

Kinnel: Yeah, that's right. Funds like Hotchkis & Wiley Mid-Cap Value (HWMAX), DFA U.S. Small Value (DFSVX), have done really well. And again, those were funds that really got crushed in the bear market last year. Hotchkis & Wiley Mid Value was one of the worst performers--huge energy bet, of course it gets hurt. And then I think DFA just reflects that that low end, that cheap end of the small-cap area was the worst place to be last year. And so now again, we're getting that rebound. It's a good reminder that sell-offs can be dramatic, but so can the rebounds. The rebounds can be pretty violent, too.

Dziubinski: And conversely, growth funds have struggled a little bit this year relative to value funds. We've seen a couple of our favorite smaller growth funds from Artisan and Brown Capital Management really bring up the rear in their respective categories this year. What's going on there?

Kinnel: Yeah, sectors really tell the story. If you look at both Brown BCSIX and Artisan ARTSX, their portfolios are almost all tech and healthcare, and tech's done okay, but healthcare has been hurt. So being overweight healthcare hurts, and then they also are lighter in some of the value side that some of their peers might at least have some exposure to, like financials. So that combination is pretty rough. So those two funds are about flat for the first half.

Dziubinski: And then let's talk a little bit about flows for the year to date. Bond funds continue to attract assets from investors, despite the fact that the stock market's done quite well, during the first half of the year. What categories in particular have been getting the most attention? And why do you think that is?

Kinnel: Yeah, it seems like core bond funds are really popular. So intermediate core, intermediate core plus, and short-term bond. And as you say, if you're looking at returns, you wouldn't have guessed those would be the big draws. I think some of it is still maybe just remembering last year, where it was a pretty scary time to be on the equity markets, even though it turned out pretty well. But it was very scary for a while there. So I think that some of it is just risk aversion. Some of it may also be a little rebalancing that after equities outperform the prior year, some of that money may be just moving into bonds to compensate for the fact that their bond portfolio was drawn down a bit.

Dziubinski: The large-blend and the large-growth categories have seen pretty sizable outflows this year. Why do you think that is?

Kinnel: We've seen within open-end, large growth and large blend are getting a lot of redemptions. I think it reflects a move that we've seen for a long-running time, a move from active to passive. Also, growth had a bit of a hiccup earlier in the year and that may have scared off some people.

Dziubinski: Well, Russ, thank you so much for your perspective on the first half of 2021. And we'll talk to you again in December or early January to recap the entire year. We appreciate your time.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.