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Morningstar FundInvestor
June 2016
Since the start of the bull market in early
2009
through
December
2015
, technology and healthcare stocks
helped fuel the typical growth fund’s edge over blend
and value funds. The Morningstar Healthcare Sector
Index and the Morningstar Technology Sector Index
returned
22
.
1%
and
21
.
4%
, respectively, compared
with the S
&
P
500
’s return of
20
.
0%
during the same
period. But
2016
has shaken things up: Technology
and healthcare stocks are down for the year to date,
with some big names posting losses for the first time
in years. Not surprisingly, funds with outsize stakes to
these sectors have also been hit hard.
I found three Morningstar Medalist funds with
at least two thirds of their portfolios in technology and
healthcare stocks. (Sector funds are excluded from
this short list.) Each fund posts strong long-term
records, but investors should keep in mind that large
sector concentrations will lead to rough patches
in performance.
Fidelity OTC
FOCPX
stands out from its typical
large-growth peer because of its large technology stake.
The fund benchmarks itself to the Nasdaq Composite
Index and allocates roughly
50%
of assets to tech stocks
and another
20%
to healthcare stocks. Even within
healthcare, portfolio manager Gavin Baker allocates a
large chunk to biotech companies.
Apple
AAPL
,
Alphabet
GOOGL
,
Athenahealth
ATHN
, and
Biogen
BIIB
consistently land among the fund’s top holdings,
and they have been nice tailwinds to performance during
the past five years. But for the year to date through
May
2016
, many of these same names have been big
detractors, contributing to the fund’s
3
.
9%
loss
during the same time period. This isn’t the fund’s first
battering: It had a rough start in
2014
, but that was
primarily due to consumer discretionary picks. This recent
bout of underperformance underscores the fund’s
sector concentration risk. Investors who have been in
this fund, which has a Morningstar Analyst Rating
of Bronze, since Baker took over in July
2009
have been rewarded—its annualized
17
.
5%
return
since then through May
2016
tops the typical
large-growth peer by roughly
4%
. But the fund’s man-
date ensures that it will always have big bets
on tech and healthcare.
Touchstone Sands Capital Select Growth
PTSGX
stashes nearly
40%
of assets in technology stocks and
30%
in healthcare stocks. Apple and
Microsoft
MSFT
have not been in the portfolio since
2013
and
2005
, respectively, but the fund has still been hit
hard by the likes of
Baidu
BIDU
and
LNKD
for
the year to date through April
2016
. Healthcare names
like
Alexion
ALXN
and
Regeneron
REGN
have also been
pain points in the fund, losing double digits during
the same time period. This relatively concentrated fund
holds around
30
companies, so any single position
has a meaningful impact on overall performance. The
fund has outpaced the Russell
1000
Growth bench-
mark and the typical large-growth peer since its inception
in
2000
, but that has come with higher levels of risk,
as measured by standard deviation. This Bronze-rated
fund works for those with a healthy tolerance for
risk, but investors should know that with healthy stakes
in technology and healthcare, the fund is susceptible
to periods of underperformance.
At the other end of the market-cap spectrum,
Brown
Capital Management Small Company
BCSIX
allo-
cates nearly
50%
of assets to small-cap technology
stocks and
35%
of assets to small-cap healthcare
stocks. The Russell
2000
Growth Index, on the other
hand, is made up of
25%
technology stocks and
28%
healthcare stocks. Tyler Technologies
TYL
and
Incyte
INCY
, which had banner years in
2015
,
have skidded for the year to date, contributing to the
fund’s
0
.
3%
loss through May
2016
. The manage-
ment team’s focus on high-quality names across sectors
has helped the fund outpace peers and the index
over the long term on both a total-return and risk-ad-
justed return basis, earning the fund a Gold rating.
But the fund’s rocky start to
2016
shows that it isn’t
insulated from market turbulence.
K
Contact Susan Wasserman at
susan.wasserman@morningstar.comFunds Vulnerable to a
Growth Meltdown
Red Flags
|
Susan Wasserman
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the
departure of a solid manager, or
a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in fact,
some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.