The Year in U.S. Equity Funds, 2018
Large-growth funds were the best performers in a generally rocky year.
The long bull market for U.S. stocks showed signs of ending in 2018, with some parts of the market already falling into bear-market territory by late December, and other parts threatening to do so. The U.S. economy remained healthy for the most part, and for most of the year stocks marched upward amid healthy corporate profits. But in the fourth quarter, the Trump Administration’s trade war with China, along with concerns over rising interest rates and general geopolitical uncertainty, spooked the markets and caused stock prices to tumble. A post-Christmas rally erased some of the losses, but through Dec. 27, the S&P 500 was down 5% for the year to date, including a 14% loss in the fourth quarter. The Russell 2000 Index of small-cap stocks was down 12% for the year to date and 21% in the fourth quarter, while the NASDAQ Composite was down 4% and 18% in the fourth quarter.
Large-cap stocks outperformed small- and mid-caps this year, as they often do when markets get nervous. Growth performed better than value, as many growth stocks benefited from strong earnings and a perception that they’ll still be able to do well in a slowing economy. Of the nine Morningstar Style Box categories, large-growth funds had the best year-to-date returns through Dec. 27 (down 3%), while small-value funds had the worst (down 16%). In 2017, large-growth funds were also the big winners, driven by enormous gains from widely held giants Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOG). In 2018 those tech giants had decidedly more mixed results. While Amazon and Netflix still posted healthy gains, Apple and Alphabet were basically flat for the year, and Facebook was down more than 20% amid concerns about the firm’s handling of data privacy.
Among sector funds, utilities, healthcare, and real estate held up well, as investors flocked to those stocks for their perceived safety and healthy dividend yields. Technology funds also performed relatively well, for the same reasons noted above for growth stocks in general, though in absolute terms the category’s average loss of 4% was far behind its 35% average gain in 2017. On the other side of the coin, energy sector funds lost an average of 28% for the year to date through Dec. 27, the worst returns of any Morningstar fund category. Commodities in general took it on the chin in 2018, with natural resources, equity precious metals, and energy limited partnership funds also among the year’s worst performers.
In the context of these trends, here are some of the biggest winners and losers of 2018 among individual domestic equity mutual funds, with an emphasis on Morningstar Medalists (those with Morningstar Analyst Ratings of Gold, Silver, or Bronze).
The list of the year’s top-performing individual funds is dominated by growth funds, especially those that benefited from the trends described above. A good example is Silver-rated Alger Small Cap Focus (AOFIX), which ranked in the small-growth category’s top 1% for the year to date through Dec. 27. Its portfolio of fewer than 50 stocks (quite concentrated for a small-cap fund) is dominated by the technology and healthcare sectors, including quite a few stocks that posted impressive gains. Its top holding, Tandem Diabetes Care (TNDM), was up more than 1000% for the year, including a 60% gain in the second half after the fund bought the stock. Several other holdings were up more than 50%, and while a handful of holdings suffered losses, they were overwhelmed by the portfolio’s big winners.
Some of the top-performing large-growth funds of 2018 similarly relied on certain popular sectors. For example, Bronze-rated Polen Growth (POLIX), the best-performing Medalist in the large-growth category, has nearly half of its portfolio in tech stocks, including top-holding Microsoft (up 20% through Dec. 27). Others succeeded by going off the beaten path. Silver-rated Akre Focus (AKRIX) achieved some of the category’s best returns with a portfolio that is almost half financials, including top-five holdings Mastercard (MA) and Visa (V) (both up by double digits for the year). Its biggest holding as of July 31 was cell-tower firm American Tower (AMT) (also up by double digits), and its biggest gainer was O'Reilly Automotive (ORLY), neither of which is very widely held by large-growth funds.
Two of the best-performing nongrowth funds of 2018 were Gold-rated AMG Yacktman (YACKX), which is in the large-value category, and Silver-rated AMG Yacktman Focused (YAFFX), which is in large blend. Like the other funds mentioned above, they have concentrated portfolios, but they didn’t have many big gainers other than Twenty-First Century Fox (FOX), a big holding in both portfolios that was up around 40% for the year. Other than that, the largest holdings in both portfolios included a lot of big consumer and tech names such as Coca-Cola (KO) and Microsoft (MSFT), which did well enough to keep the funds near the top of their respective categories in a tumultuous year.
Among the worst-performing domestic stock funds of 2018, one that epitomizes the year’s negative trends is Bronze-rated Invesco Small Cap Value (VSCAX). As its name implies, it’s in the small-value Morningstar Category, the worst performer of the nine style-box category. The fund is heavy in the industrial, basic materials, and consumer cyclical sectors, all of which had a rough time this year due to fears of an economic slowdown. And the deeply discounted stocks that dominate the portfolio had lots of problems in 2018, with 10 of the top 15 holdings losing more than 20% for the year through Dec. 27. As of Dec. 28, the fund ranked in its category’s 98th percentile with a 26% year-to-date loss.
Silver-rated Oakmark Select (OAKLX) was another big loser in 2018, with almost identical returns to Invesco Small Cap Value’s, though it got there through a different path. It’s a large-blend fund, and its top holding as of Sept. 30, 2018, was Alphabet, with Mastercard (up 25% for the year) also in the top five. Unfortunately, Mastercard was its only holding with positive returns for the year, as most of the names in the 22-stock portfolio suffered steep losses. A venture into energy stocks such as Apache (APA) and Weatherford International (WFT) proved disastrous, and big financial holdings such as Citigroup (C), Ally Financial (ALLY), and AIG (AIG) lost more than 20% each. These problems prompted Morningstar to downgrade the fund’s Analyst Rating to Silver from Gold in November, but it’s still a fine fund for investors who can handle the dry spells. Its less-concentrated counterpart, Oakmark (OAKMX), held up a bit better in 2018 and retains its Gold rating.
Finally, it’s worth mentioning Fairholme (FAIRX), the former highflier managed by Bruce Berkowitz. In 2017, it had the worst returns of any fund covered by Morningstar analysts, and it’s on track for similarly disastrous results in 2018, with a 23% loss through Dec. 27 that ranked at the bottom of the large-value Morningstar Category. Nearly 30% of the Aug. 31 portfolio was in St. Joe (JOE), which lost 28% for the year, and the fund’s position in Sears Holdings (SHLDQ) lost 95% for the year, as that company’s future came increasingly into doubt. An exodus of senior staff, along with terrible performance and outflows, led Morningstar to downgrade the fund’s Analyst Rating to Negative from Neutral in March. Berkowitz’s tendency to make huge bets on sometimes illiquid securities worked very well from 2000 through 2009, but it has been a disaster in recent years.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.