484 / 772
2
What all that means is that boom-and-bust cycles are
more dramatic in large growth than anywhere else.
And when it goes bust, the Russell
1000
Growth Index
gets crushed as it is heavily tilted toward high-priced
stocks. It is no accident that the index was most beat-
able during
10
-year stretches that ended in or shortly
after bear markets and was hardest to beat after
long rallies.
Go back to
2000
, when
CNBC
’s Jim Cramer declared
that funds beating the S
&
P
500
were unimpressive.
They had to beat the Nasdaq
100
to impress him. Of
course, that would have led him to the most aggres-
sive growth funds out there just in time for the bottom
to fall out.
The second reason for the category’s mood swings is
lack of purity. While the index is a rather pure
expression of large growth, most funds in the category
are not. Many managers have broader mandates
than large growth and so own a fair amount of the
adjoining style boxes: large-blend, mid-blend,
and mid-growth.
In a year when small caps or value are leading the
charts, actively managed large-growth managers can
easily beat the index. But when it’s all about large-
growth stocks like Apple and
Gilead Sciences
GILD
,
many funds get left behind.
While I’ve covered the extremes, it’s also worth
looking at the creamy middles. I looked at
15
10
-year
periods, and the average time period saw
49%
of large-growth funds beat the index. Or, you could
select the median, in which
41%
beat the index.
That sounds about right to me as it seems unwise to
bet on nearly half the funds beating the index.
What’s the Upshot for Investors?
Clearly, the Russell
1000
Growth Index is an imperfect
measure for many large-growth funds. Look at a
fund’s performance relative to its large-growth peers
as well as to the index to gain a better perspective
on whether the manager has added value. You can
see that in our data fields where we show
category rank.
If we apply this standard to actively managed funds
in the Morningstar
500
’s large-growth category, we
find
17
funds that beat both the index and category.
I used the
10
-year Sortino ratio rather than straight
10
-year returns because Sortino is a risk-adjusted
measure and I didn’t want to simply reward high-risk
funds this long into a bull market. I also used category
rank to throw out any subpar performers. Because
fundamentals such as manager, strategy, and fees are
more important than past returns, I’ll throw in the
additional screen of requiring that a fund receive a
Morningstar Medalist ranking. That throws out one
The Large-Growth Conundrum
Continued From Cover
The Large-Growth Roller Coaster
p
Large-Growth Outperformance Rate
p
Average
p
Median
Data as of 12/31/2014. What percentage of large-growth funds beat the Russell 1000 Growth Index over the trailing 10 months? As you can see, it varies by a tremendous
amount. We hit a low ebb in 2003, a high point in 2008, and now we are back to an even lower point than in 2003. The horizontal lines represent the average and the
median rates of outperformance.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
80
70
60
50
40
30