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By Christine Benz and Shannon Zimmerman | 12-16-2013 01:00 PM

2013 Not a Gamechanger for Equity-Fund Investors

Small and mid-caps outperformed large, and growth was mostly better than value, but Morningstar's Shannon Zimmerman urges investors to stick with their game plans.

Christine Benz: Hi, I'm Christine Benz for Equity mutual funds enjoyed very strong returns in 2013. Joining me to provide a recap of the year is Shannon Zimmerman. He's associate director of fund analysis with Morningstar.

Shannon, thank you so much for being here.

Shannon Zimmerman: Good to be with you, Christine.

Benz: Shannon, this is the time of year, where investors do that review of their portfolios' holdings. Let's start with the Morningstar Style Box lens. When you look at the Morningstar Style Box, in which categories have outperformed and underperformed, what do you see? Am I better off in small versus large, value versus growth, and so forth?

Zimmerman: Yes. Certainly, this year, smaller has been better. Everybody is a winner in absolute terms; the market is up substantially year to date. But small-cap, on a relative basis, has certainly outperformed larger-cap fare. Mid-cap funds have done better than large-cap funds, as well.

The valuation spectrum has been less of a factor. But still, growth funds--at least at the extreme--in the small-cap arena, growth funds have outperformed value funds. And that's also true among large-cap funds. Large-cap growth funds have fared better than large-cap value funds.

And among mid-cap funds, the reverse is true. Value has actually beaten growth. But the valuation spectrum really has been a small factor compared with the market-cap factor which has been quite large.

Benz: I should keep this in mind as I review my holdings. Even if I have, say, a large-blend fund that I know tends to lean a little bit toward growth stocks, that might explain why it has beaten its peers so far this year?

Zimmerman: That's exactly right. You might have a manager who got lucky and was standing in the right place at the right time.

Benz: When you look at the sector view, are there any sectors that have performed especially well, and which sectors would investors look to as being sort of depressive when they look at their portfolio holdings?

Zimmerman: Utilities have fared the worst among the sectors. But the two sectors that we've kind been talking about off and on throughout the year--consumer discretionary and health care--are the ones that are kind of going to go down to the wire.

Consumer discretionary as of [Dec. 15] is up on health care by less than a percentage point actually. They've been neck and neck all year, and it's going to go down to the wire.

Health care is particularly interesting because you might think that the companies that are doing best in the health-care sector are those that would benefit from the dust mostly settling on Obamacare. But that's not the case. It's really that the biotechs. Gilead Sciences is among the top performers in the health-care sector and so is Biogen Idec, which is up over 110% so far in the year.

Benz: Even if I don't own a sector fund, I probably still have a fund or two that have benefited from these types of exposures?

Zimmerman: Absolutely. It's such an important point. A lot of times, we'll field queries from reporters, and they want to know about the hot tech fund, for instance. And we'll say it could be the S&P 500 because if you invest in an S&P index tracker, 20% or more of your assets are already in tech. How much more do you need? That's true for health care, as well, this year.

One of the funds that I cover is ClearBridge Aggressive Growth, which is run one by the longest-tenured managers in the industry, Richie Freeman, and his comanager, Evan Bauman, who we had a chance to speak with about a month ago. They have about a little over one third of that funds' assets in health care right now. Biogen Idec is their top holding, and it's a huge position size, too, at about 11%. Lo and behold, the fund is doing quite well.

Benz: Pretty good.

Zimmerman: It's a very volatile fund, very concentrated in terms of overall names, but then concentrated at the very top of the portfolio, as well. But, yes, it is having a terrific year; in large part. Richie Freeman is a good stock-picker. But having one third of the assets in health care has certainly been a benefit.

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