Winners and Losers in U.S. Equity Funds, 2015
Large growth fared best, while funds with heavy energy stakes collapsed.
Domestic-equity mutual funds, and the U.S. stock market in general, have taken investors on another wild ride in 2015. After eking out modest gains in the year’s first half, the S&P 500 fell more than 6% in the third quarter before recovering some of that in the fourth quarter. A continuing slump in energy prices, anticipation of rising interest rates, and weakness in the Chinese economy have been among the factors contributing to the market’s volatility this year.
As of Dec. 15, the S&P 500 was basically flat for the year (technically up 0.21%), but that number masks dramatic differences in how various sectors of the market have performed. A few big growth names such as Amazon.com (AMZN) and Netflix (NFLX) have posted eye-popping triple-digit gains in 2015, while most energy stocks have been hammered hard by the rout in oil and gas prices, with many stocks down 30% to 40% or more.
This divergence is reflected in the performance of fund categories. Of the nine Morningstar Categories of the Morningstar Style Box, only large growth has a positive year-to-date return, about 2% as of Dec. 15, with mid-cap growth a distant second. Small caps and value stocks have taken it on the chin in 2015, with the small-value category losing an average of 8.14%. Among sector funds, healthcare and technology funds have performed the best in 2015, each gaining about 4% on average for the year to date as of Dec. 15. The equity energy and energy limited partnership categories, on the other hand, have suffered average losses of 28% and 41% over the same period. Equity precious-metals and natural-resources funds have lost more than 20% on average, while utilities funds have lost an average of 14%.
With all this in mind, here’s a closer look at some of the winners and losers among diversified U.S. equity funds in 2015. (All return figures below are as of Dec. 15.) As usual, a fund’s short-term performance shouldn’t determine whether you buy or sell it; for that, it is best to look at a fund’s Morningstar Analyst Rating.
Winner: Funds With FANGs
For most of 2015, four of the hottest stocks around were Facebook (FB), Amazon.com, Netflix, and Google, leading to the playful acronym FANG to describe these four Internet behemoths. That acronym hasn’t worked so well since Google underwent a corporate reorganization and renamed itself Alphabet (GOOG) in October, but these stocks have remained stellar performers; all have gained at least 30% for the year, with Amazon.com and Netflix up more than 100%. Funds with a lot of exposure to the four have mostly done very well this year.
For example, Morgan Stanley Institutional Growth (MSEQX), managed by 2013 Morningstar Domestic-Stock Fund Manager of the Year Dennis Lynch and his team, has gained 11% this year to rank near the top of the large-growth category; it’s no coincidence that 23.4% of the fund’s most recent portfolio is in the FANG stocks, with Amazon.com, Facebook, and Alphabet being three of its top five holdings. Harbor Capital Appreciation (HACAX) has put up very similar numbers, with all four FANG stocks among its top 10 holdings; T. Rowe Price Blue Chip Growth (TRBCX) has also excelled this year by owning all four stocks, with Amazon.com, Alphabet, and Facebook being three of its top four holdings.
Loser: Funds With a Lot of Energy Exposure
Given the big recent losses suffered by energy stocks, it is no surprise that funds with heavy exposure to that sector have tended to do poorly in 2015. One of the most prominent examples is FPA Capital (FPPTX), formerly managed by two-time Morningstar Fund Manager of the Year Bob Rodriguez but now run by Dennis Bryan and Arik Ahitov. That fund has more than one fourth of its portfolio in energy stocks, the most of any diversified Morningstar Medalist fund, and it has lost 17% for the year, putting it in the bottom 6% of the mid-cap-value category. American Century Value (TWVLX) has lost 6% and trails two thirds of its large-value peers; a big reason is its 20% energy stake, including top-10 holdings Exxon Mobil (XOM) and Chevron (CVX).
Winner: Dividend-Focused, Consumer-Heavy Funds
Given the market volatility and continuing low interest rates, investors have been searching for stability and yield, and dividend-paying stocks typically fit that bill well. Energy names have usually been among the most prominent dividend-payers, which has hurt some dividend-oriented funds this year. But others that put more emphasis on consumer staples have done very well in 2015. For example, Federated Strategic Value Dividend (SVAAX) and Invesco Diversified Dividend (LCEAX) both rank in the top 5% of the large-value category this year while having more than one fourth of their portfolios in the consumer defensive sector. For the Federated fund, these are mainly tobacco stocks-- Altria Group (MO), Reynolds American (RAI), and Philip Morris International (PM) are all among its top six holdings, and all have posted double-digit gains. The Invesco fund has General Mills (GIS), Campbell Soup (CPB), Coca-Cola (KO), and Heineken (HEIA) as its top four holdings, and all except Coke have also put up nice gains this year.
Loser: Funds That Hold Smaller Stocks
Given the underperformance of small caps and the primacy of big names in 2015, it makes sense that funds holding stocks on the smaller end of the market-cap spectrum have tended to struggle. Two of the more prominent micro-cap funds, small-blend Berwyn (BERWX) and small-value Royce Opportunity (RYPNX), have landed in their categories’ bottom deciles this year despite their solid long-term records. Within the mid-cap and large-cap categories, numerous funds with a relatively big weighting in smaller stocks, such as Weitz Partners Value (WPVLX) in large value and Longleaf Partners Small-Cap (LLSCX) in small blend, have mostly trailed their peer groups.
Winner: Small-Value Funds With Plenty of Financials
Small-value funds had a tough time this year, but those that held up best tended to have significant holdings in financial stocks, ranging from small community banks to niche insurers and asset managers. Fidelity Advisor Small Cap Value (FCVAX) has lost money overall in 2015 but still ranks in the small-value category’s top decile, thanks in part to its 30% financials stake. Several other small-cap funds with healthy financial weightings, including American Century Small Cap Value (ASVIX) and DFA Tax-Managed US Targeted Value (DTMVX), have also done well in relative terms. In contrast, some of the worst-performing small-value funds of 2015, including Royce Special Equity (RYSEX) and Artisan Small Cap Value (ARTVX), hold relatively few financials.
Loser: Concentrated Funds With Bad Bets
A highly concentrated portfolio is a double-edged sword; a few great picks can give a fund a big boost, but a few bad ones can send short-term returns into the dumper. While a few highly concentrated funds have done well this year (notably Clipper (CFIMX), which has Amazon.com among its top holdings), more have suffered as their top picks lost big.
Longleaf Partners (LLPFX), with only 18 holdings, has lost 21% and ranks in the bottom 1% of large-blend funds because of big losses by such holdings as Scripps Networks Interactive (SNI) (down 28%), Chesapeake Energy (CHK) (down 79%), and Wynn Resorts (WYNN) (down 56%). Other concentrated funds that have taken it on the chin in 2015 include GoodHaven (GOODX), RiverPark/Wedgewood (RWGFX), Royce Special Equity Multi-Cap (RSEMX), Vulcan Value Partners (VVPLX), and Sequoia (SEQUX), which has been hit especially hard by its huge stake in Valeant Pharmaceuticals (VRX). Despite that setback, Sequoia has retained its Morningstar Analyst Rating of Gold, and the other funds listed here are Morningstar Medalists as well. That indicates that Morningstar’s analysts still consider them good funds worth owning and is a good reminder not to place too much emphasis on short-term results.
David Kathman has a position in the following securities mentioned above: RYSEX. Find out about Morningstar’s editorial policies.