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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%
.
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.
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.
Loser: Funds With No Tech and a Lot in Fannie Mae/
Freddie Mac and Sears
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
The Winners and Losers of U.S. Equity
in 2014
Tracking Morningstar Analyst Ratings
|
Russel Kinnel
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.