U.S. Value Funds Beat Growth in the First Quarter
The difference between growth and value funds was stark.
It was a rocky first quarter for U.S. equity funds. Nearly 90% of U.S. equity funds under Morningstar coverage lost money in 2022’s first quarter. Rising inflation and the war between Russia and Ukraine hampered growth and small-cap stocks. The small-growth Morningstar Category lost an average of 12.8%, the largest loss among the Morningstar Style Box categories.
The difference between growth and value funds was stark. The Morningstar US Value Index gained 2.4%, while the Morningstar US Growth Index lost 12.0%. The mid-, large-, and small-cap value categories each retreated but held up better than their blend and growth counterparts. Rising oil prices also helped U.S. equity energy funds, which jumped 32.9% on average. Higher commodity prices and global supply chain snarls also bolstered commodity funds, which rose 24.4% in the first quarter.
Technology stocks bore the brunt of the selloff. U.S. tech funds’ 13.7% average loss was their worst quarter since 2018’s fourth quarter. Small-growth companies also suffered. Small-growth firms in the biotech and pharmaceutical industries fell hard. Kodiak Sciences (KOD), MEI Pharma (MEIP), and Accelerate Diagnostics (AXDX) were among the worst-performing constituents of the Russell 2000 Growth Index in the first quarter.
While most U.S. equity funds faced losses in the quarter, funds with a higher Morningstar style factor profile score (value-oriented funds) tended to hold up much better than their growth-oriented counterparts. Indeed, funds with a higher style score, such as Poplar Forest Partners (IPFPX), Victory Integrity Discovery (MMEYX), and BNY Mellon Opportunistic Mid Cap Value (DMCVX), benefited from stylistic tailwinds. Meanwhile, funds with a higher growth profile, such as PGIM Jennison Focused Growth (SPFZX), Allspring Enterprise (SENAX), and Artisan Small Cap (ARTSX), fared much worse.
Fidelity New Millennium (FMILX), which has a Morningstar Analyst Rating of Bronze, was among the first quarter’s best-performing large-blend funds, topping the Russell 1000 Index’s 5.1% loss with a 2.3% gain. Manager John Roth is a contrarian whose approach can be volatile. The fund’s 13.4% energy stake--nearly 10 percentage points greater than the index’s--provided a strong tailwind. Financial-services picks, such as Wells Fargo (WFC), also boosted returns.
Bronze-rated Hotchkis & Wiley Small Cap Value (HWSIX) and Hotchkis & Wiley Mid-Cap Value (HWMIX) both beat 99% of their respective category peers. Large helpings of energy stocks propelled the deep-value funds’ respective 9.1% and 9.7% gains, which swamped the Russell 2000 Value Index’s and Russell Midcap Value Index’s more than 1% losses. Both funds benefited from their stakes in Kosmos Energy (KOS), which gained more than 100% during the quarter.
More-conservative growth funds held up better than their aggressive peers. Silver-rated Eaton Vance Atlanta Capital SMID-Cap (EISMX) managers Chip Reed, Bill Bell, and Matt Hereford favor steady growers that tend to lag when flashier stocks rally but show resilience in drawdowns. The fund lost 4.7% in the first quarter, which was much less than the Russell Midcap Growth Index’s 12.6% drop. Financial-services, healthcare, industrials, and tech picks, such as WR Berkley (WRB), Markel (MKL), and WEX Inc. (WEX), helped buoy the fund.
Gold-rated Morgan Stanley Institutional Growth’s (MSEQX) 26.7% nosedive made it one of the quarter’s worst-performing large-growth funds, with a much worse showing than the Russell 1000 Growth Index’s 9.0% loss. The growth-fueled strategy run by Dennis Lynch is prone to ups and downs. The fund’s stake in Snowflake, a 2020 IPO that grew to more than 7% of the December 2021 portfolio, was among the fund’s leading detractors. But this fund has rebounded from steep losses before.
Cathie Wood’s Negative-rated ARK Innovation ETF (ARKK) continued a sharp decline that started in late 2021. Its 29.9% first-quarter loss more than doubled the Russell Midcap Growth Index’s 12.6% drop. The team’s aggressive-growth tech and healthcare picks have weighed heavily on returns. Roku (ROKU), a 6.5% stake in the fund as of March 30, lost more than 45% for the year to date; Zoom Video Communications (ZM), a 6.3% position, was down more than 40%; and Shopify (SHOP), a 2.7% holding, was down more than 50%.
Some value funds missed the stylistic tailwinds. Silver-rated Oakmark Select (OAKLX) lost 6.1% in the quarter, worse than 98% of its large-value peers and lagging the 4.6% loss of its S&P 500 prospectus benchmark. Communication services and real estate picks, such as Netflix (NFLX) and CBRE Group (CBRE), weighed on performance. So did the concentration of the roughly 20-stock portfolio assembled by managers Bill Nygren and Tony Coniaris. While the team emphasizes valuation and free cash flow among other metrics, this is not a deep-value strategy. Its high-conviction approach will consider nontraditional value stocks that can make it perform out of step with category peers.
David Carey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.