(PUB) Investing 2015

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The Winners and Losers of U.S. Equity in 2014 Tracking Morningstar Analyst Ratings | Russel Kinnel

Loser: Funds That Love Twitter and Hate Health Care Dennis Lynch’s team at Morgan Stanley made a mint with the Twitters TWTR and Groupons GRPN of the world in 2013 , but in 2014 they gave some back as the market decided that Twitter’s shares had gotten a little frothy. Gold-rated Morgan Stanley Institu- tional Small Company Growth MSSGX shed 14% . Morgan Stanley Institutional Mid Cap Growth MPEGX was down 1 . 3% , and Morgan Stanley Insti- tutional Growth MSEQX gained 5% , which was still in the bottom quartile. Winner: Funds With Big Tech Weightings Not every tech name was a winner, but many were. Apple AAPL , Microsoft MSFT , and Nvidia NVDA were among the best performers, and Bronze-rated Fidelity OTC Portfolio FOCPX held them all, leading to a 16% gain. The fund is benchmarked to the Nasdaq, so it has a lot in tech by definition. Amana Growth had Apple, too, along with Adobe ADBE and Akami AKAM , leading the fund to a 13% gain. OK , I stretched when I wrote “funds”—Silver-rated Fairholme FAIRX is the only one I know that fits the bill. Its Fannie Mae and Freddie Mac preferreds were down 54% and Sears SHLD was down 9% . Fannie Mae and Freddie Mac common shares are also in the portfolio, and they were down 19% and 18% for the year, respectively. Ouch. The fund lost 3% in 2014 , though it had an awesome 35 . 5% gain in 2013 . Loser: Micro-Cap Funds Naturally, in a year when bigger is better, you’d expect micro-cap funds to have a tough year. Bronze- rated Royce Opportunity RYPNX lost 2% , and Gold-rated DFA US Micro Cap DFSCX gained 1% . Winner: S & P 500 Funds Similarly, in a year when bigger is better, S & P 500 funds will outperform total stock market funds. Gold-rated Vanguard 500 Index VFINX is top quar- tile for the year to date, while Vanguard Total Stock Market Index VTSMX is second quartile and Vanguard Extended Market Index VEXMX slid to the third quartile. œ Loser: Funds With No Tech and a Lot in Fannie Mae/ Freddie Mac and Sears

It was a fine year to be in large caps. Small caps had the upper hand in most of the past 10 years, but that didn’t happen in 2014 . The average large-blend fund gained 9% compared with 0 . 3% for small blend and 5% for mid-blend. Valuation is certainly one part of the story. Many years of outperformance left small caps looking pricey. GMO ’s Ben Inker said at the Morningstar Investment Conference in June that he wouldn’t touch small caps with a 10 -foot pole. He may have been on to something. Growth versus value was more or less an even draw, though value was a more treacherous place to be as the industry look below explains. The sector differences were even more dramatic. Health care repeated its role from 2013 as the best sector, with an average return of 27% . After that, a pair of higher-yielding equity sectors, real estate and utilities, enjoyed robust returns of 27% and 14% , respectively. Technology also enjoyed an 11% gain. On the downside, oil’s plunge drove natural- resources stocks off a cliff in the second half of the year. With oil prices down to $60 or so a barrel, it’s no surprise that equity energy would be down about 20% , natural resources down 15% , and equity precious metals down 7% .

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.

A fund’s position within sectors and market cap explained a lot. Let’s dig into the winners and losers.

Winner: Growth Funds That Like Health Care Primecap’s growth funds, which have Morningstar Analyst Ratings of Gold, are all fond of health care, including biotech, and they produced returns between 15% and 20% , all topping nearly all of their peers. Silver-rated ClearBridge Aggressive Growth SHRAX and Amana Growth AMAGX also rode health care to a big year.