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Fund Spy: Morningstar Medalist Edition

The Best and Worst Medalists of 2015's First Quarter

Small growth and biotech exposure led, while large value lagged.

Mentioned: , , , , , , , , ,

International-equity funds beat domestic-stock funds in 2015's first quarter through March 26; small cap edged large cap, and growth trounced value. Here's a look at some of the best and worst Morningstar Medalist funds of the year's opening frame.

Among international funds, a rising dollar tempered the returns of unhedged foreign-stock funds, but overseas equity offerings still turned in some of the best absolute performances of the year thus far. Funds with significant exposure to Japan and India, as well as smaller companies, did the best. Indeed, two Matthews funds with Morningstar Analyst Ratings of Bronze-- Matthews Japan (MJFOX) and  Matthews India (MINDX)--were up 16.6% and 8.9%, respectively. These were among the most impressive results of the year- and  quarter-to-date through March 26 in Morningstar Manager Research's coverage universe.

International funds with meaningful mid- and small-cap exposure led the way in the more diversified overseas categories. Bronze-rated foreign small/mid-blend fund  Oakmark International Small Cap (OAKEX) and Bronze-rated foreign large-blend fund  Fidelity Overseas (FOSFX) ranked near the top of their respective peer groups with respective gains of 10.2% and 8.0%. Bronze-rated foreign large-growth fund  Thornburg International Value (TGVAX) also put up a competitive 7.5% return in the quarter that was more than 2 percentage points ahead of its Morningstar Category's average. Strong returns from Sony (SNE) of Japan, NXP Semiconductors (NXPI) of the Netherlands, and  Novo Nordisk (NVO) of Denmark fueled the fund's run.

In the United States, small growth fared the best in the first three months of 2015, and so did funds owning a lot of health care, particularly biotechnology. Bronze-rated  Century Small Cap Select (CSMVX) was at the nexus of both performance trends and gained 8.4%, more than doubling the small-growth peer group average. Many of the fund's top-performing stocks of the year through March 26 were health-care or related companies, including Cambrex (CBM), Anacor Pharmaceuticals (ANAC),  Icon (ICLR),  Akorn (AKRX), AMAG Pharmaceuticals (AMAG), NPS Pharmaceuticals (recently merged with  Shire (SHPG)), and Pharmerica (PMC). More than a couple of health-care stocks, such as Esperion Therapeutics (ESPR), Cempra (CEMP), Icon, and Fluidigm (FLDM), helped Gold-rated  Wasatch Small Cap Growth (WAAEX) to a more than 6% return, but so did the fund's 10% stake in Indian companies, including  HDFC Bank (HDB).

At the bottom of the quarter-end ranking tables were stock funds with exposure to commodities, energy, and Latin America; so were a few high-conviction value managers. The large-value category was the weakest spot among the nine diversified domestic Morningstar Style Box categories in the first quarter with an average loss of 0.52% through March 26; small- and mid-value also lagged other equity types. So it makes sense that managers who focus on out-of-favor fare struggled.

Cash and energy dragged on Silver-rated  FPA Capital (FPPTX). The fund has more than a fourth of its assets on the sidelines because of what managers Dennis Bryan and Arik Ahitov regard as high valuations in their small- and mid-cap opportunity set. That has restrained returns in a still-rising market, but a nearly 30% stake in energy stocks also has hurt. That's actually a smaller commitment than the fund's five-year average energy sector weighting of more than 40%. The fund had shed more than 5% and trailed nearly all of its mid-cap value peers for the year through the end of March.

Bruce Berkowitz's  Fairholme (FAIRX) shed 2.5% as  Bank of America (BAC), the fund's top holding at 22% of assets, fell by double digits. Berkowitz's former colleagues Larry Pitkowsky and Keith Trauner at  GoodHaven (GOODX) lost 4.0% as a variety of picks, including mortgage servicer Ocwen Financial (OCN),  Hewlett-Packard (HPQ), and some smaller energy stocks, fell hard.

Fears that a slowing economy and a crackdown on official corruption in China will hurt gaming stocks  Wynn Macau and Galaxy Entertainment took those stocks down in the first quarter, which contributed to David Winters' 3.3% loss at  Wintergreen Fund (WGRNX).

And Donald and Stephen Yacktman's Gold-rated  AMG Yacktman (YACKX) and Silver-rated  AMG Yacktman Focused (YAFFX) lost more than 3% each because of big positions in large brand-name media, technology, and consumer products companies that retreated, such as  Twenty-First Century Fox (FOX),  Microsoft (MSFT), and  Procter & Gamble (PG). Positions in  ConocoPhillips (COP) and  Exxon Mobil (XOM) also were a drag.

Before getting too euphoric or despondent about your fund's first-quarter results, take a deep breath and ask yourself some key questions. Is this what you would have expected from this manager or approach in this environment? Is this still an enduring strategy that can help you reach your long-term goals? Are you comfortable with this level of risk and fees? Answers to these sorts of questions can keep you from either chasing performance, selling too soon, or taking other hasty actions in reaction to short-term results. 

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Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.