(PUB) Investing 2015

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9 Morningstar FundInvestor October 2015
Exhibit 2 shows the results in a different way, via the
average excess returns that each scenario produced
in the subsequent three-year periods. Again, context
matters a lot here. As a group, large-growth funds
have trailed the Russell 1000 Growth Index by an
average of 1.61 percentage points net of expense over
those rolling periods. Funds with returns that beat
their peers during the past three years subsequently
trailed the index by 1.49 percentage points three
years later—that’s better than just picking at random.
It’s also better than picking funds with strong past
sector-rotation results, which trail the index by an
average of 1.64 percentage points three years later.
Choosing funds by stock-picking or by the combina-
tion of low sector allocation/high stock selection
yields better returns than any of the previous methods.
Screening the M500
These relatively subtle outcomes for large-growth
funds are at least partly due to the more efficient
markets seen in the larger-cap space. Adding a
qualitative analysis consideration via the forward-
looking Morningstar Analyst Ratings improves
the numbers considerably. Exhibit 3 presents the
large-growth Morningstar Medalist funds within
the M 500 that meet the top-half stock-selection/
bottom-half sector-allocation screen.
Many of the names on the list are longtime analyst
picks and well known to investors. There are four that
have won Morningstar’s Fund Manager of the Year
award, including 2014’s winner, the team at Primecap
that manages Primecap Odyssey Growth POGRX
and subadvises Vanguard Primecap Core VPCCX.
Similar to most funds in the group, the team takes a
sector-agnostic approach to investing, more or less
allowing the market’s most attractive opportunities to
guide their portfolios. TIAA-CREF Growth & Income
TIGRX is one of the few funds on the list that sticks
more closely to its benchmark, the S&P 500. Though it
doesn’t follow the Russell 1000 Growth Index, the
fund’s attention to a benchmark produces relatively
stable sector weightings. As a result, manager Susan
Kempler’s main source of added value has come
primarily from stock-picking.
As a group, the M500 large-growth funds that pass
the two-part screen also outpace the Russell 1000
Growth Index, on average. That outcome serves as a
reminder of the usefulness of adding the human
analytical touch to mechanical fund screening. K
Contact Janet Yang at
Data from 07/2005–06/2015. Average excess returns versus Russell 1000
Growth Index over three-year rolling periods.
Exhibit 2 Added Value of Large-Growth Funds
Return Sector
Allocation
Stock
Selection
Sector &
Stock
All
-1.49%
-1.64%
-1.36% -1.40%
-1.61%
0.0
-0.4
-0.8
-1.2
-1.6
Exhibit 3 M500 Large-Growth Funds
Fund
Morningstar
Analyst Rating
Morningstar
Rating
Avg 3-Yr
Annl Excess
Return in
Subsequent
3-Yr Period
ClearBridge Aggressive Growth IS • QQQ 5.5
Touchstone Sands Cap Select Grw ´ QQQ 4.0
Vanguard PRIMECAP Core ΠQQQQQ 2.7
PRIMECAP Odyssey Growth ΠQQQQQ 2.2
Morgan Stanley Inst Growth IS ΠQQQ 1.4
Sequoia ΠQQQQQ 1.2
T. Rowe Price Blue Chip Growth • QQQQQ 0.8
T. Rowe Price New America Growth ´ QQQQQ 0.6
Harbor Capital Appreciation Instl ΠQQQQQ 0.6
Fidelity New Millennium ´ QQQ 0.5
TIAA-CREF Growth & Income Instl ´ QQQQ -0.9
American Funds New Economy R6 ΠQQQQ -1.0
Fidelity Contrafund K • QQQQQ -1.1
LKCM Equity Instl • QQ -1.2
Amana Growth Institutional • QQQ -1.7
T. Rowe Price Spectrum Growth ´ QQ -2.8
American Funds Grw Fnd of Am R6 ´ QQQ -3.8
Average QQQQ 0.4
Source: Morningstar Analysts.