How Have the Highest-Flying Stock Funds Done Lately? Not Great
Funds that gained more than 100% in 2020 fell about 3% on average last year, with most badly lagging the market. This fits the historical pattern.
Last year we examined the performance of funds that had gained more than 100% in a calendar year. We found those funds tended to struggle in the years that followed their 100%-plus year. Now that a year has gone by, we thought we'd check back in on the 18 funds that gained 100% or more in 2020 to see how they did in 2021.
Last year was a tough one for the 18 funds that gained 100% or more in 2020. The majority lost money and, in general, the higher they rose in 2020, the harder they fell in 2021, as shown below:
The average fund lost 2.6% in a topsy-turvy year that showed early promise but then took a turn for the worse in the spring. All told, every fund saw at least a 15% drawdown, the average drawdown being 26%.
Exhibit 2: Maximum Drawdown: Jan, 1 2021 Through Dec. 31, 2021
True, these funds fared better in 2021 than did other funds in the 12 months that followed the calendar year in which they notched a triple-digit gain. Indeed, entering 2021, the average fund that gained 100% or more in a calendar year skidded to a 9.9% loss in the 12 months that followed it.
Nevertheless, unlike the other subsequent 12-month periods we examined, 2021 was a year in which relatively few stock funds notched losses amid a continuing bull market. For that reason, it makes sense to also look at these 18 funds' returns relative to the market. After crushing their category benchmark indexes in 2020, these 18 funds significantly lagged in 2021, with the average fund trailing its benchmark by almost 20%.
Two funds bucked the trend, however: In 2021, Baron Partners and Baron Focused Growth gained 31.4% and 18.8%, respectively, topping their indexes and most of their category peers.
What explains their success in an otherwise forgettable 2021 for these 18 funds? Tesla. The Baron funds held huge stakes in the electric vehicle manufacturer throughout 2021. When Tesla soared, as it did through much of 2021, that cemented the funds' strong showing.
While 2021 was difficult for most of these 18 funds, nearly all continue to boast good long-term records. To illustrate, here are the funds' average excess returns (vs. their category indexes) over the trailing three- and five-year periods ended Dec. 31, 2021.
All told, 15 of the 18 funds still boasted a 4- or 5-star Morningstar Rating as of Dec. 31, 2021.
These 18 funds have gotten off to a rough start thus far in 2022, with the average fund tumbling to an 12% loss for the year to date through Jan. 13. While that might be discouraging to the funds' shareholders, the silver lining is that the funds' holdings look a bit less expensive than before. To illustrate, the following exhibit tracks the price/cash flow ratio of the 18 funds' underlying holdings in aggregate over the past few years
Exhibit 6: Time-Lapse of Price/Cash Flow Ratio of 18 Funds' Aggregate Stock Holdings
Nevertheless, these funds' holdings are hardly cheap, as shown in the next exhibit, which runs the 18 funds' aggregate holdings through Morningstar's Factor Profile tool:
Exhibit 7: Factor Profile of the 18 Funds' Aggregate Stock Holdings
To summarize, the 18 funds' holdings are more highly valued than the growth-heavy Nasdaq 100 Index, and far exceed the S&P 500's valuation (Style in the exhibit above). When compared with the S&P 500's holdings, the 18 funds own stocks that:
These funds have nearly three fourths of their assets stashed away in pricey sectors like technology (35%), consumer cyclical (24%), and communication services (15%), with healthcare soaking up another 14%.
And even after this pullback, these funds' holdings don't look invitingly cheap to our analysts. In aggregate, the funds' holdings were recently trading at a roughly 7% premium to our analysts' fair value estimates, with the top 10 holdings of this group shown below.
Most of the 18 funds that gained 100% or more in 2020 fared poorly in 2021. While these funds continue to boast strong long-term records, our research has found that this weakness can persist.
There's no guarantee that pattern will play out with respect to these 18 funds, and their holdings have gotten less expensive amid the recent pullback. Moreover, for investors who have a suitably long time horizon and the patience to wait out potential adversity, there are several funds on the list that our analysts highly recommend, such as Morgan Stanley Institutional Growth (MSEQX), which has a Morningstar Analyst Rating of Silver.
But given the historical pattern we've observed and the mixed fundamental outlook for these funds' holdings, performance will bear watching in the months ahead. We'll report back as developments warrant.
Jeffrey Ptak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.