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First Quarter in U.S. Equity Funds: Growth Dominates Value

After a tough 2016, growth made a comeback in 2017's first quarter.

Andrew Daniels, CFA, CMA, 04/03/2017

U.S. stocks continued their march higher during 2017’s first quarter to date through March 30. The S&P 500 was up 6.3%, while the Russell 2000 Index was up 2.2%. For most of the quarter, investors remained upbeat that a Donald Trump presidency would result in pro-growth policy changes, though doubts are mounting after a failed effort to reform U.S. healthcare in late March. Economic data--including employment reports and consumer confidence--was generally strong during the first quarter, contributing to the Federal Reserve's March decision to raise short-term interest rates for the second time in four months.

Technology stocks within the broad Russell 3000 Index have led the way in the first quarter, climbing 12%. Tech giants Apple AAPL and Facebook FB rose nearly 25%, while hardware firms NetApp Inc NTAP and Western Digital WDC climbed more than 15%. T. Rowe Price Global Technology PRGTX, with a Morningstar Analyst Rating of Silver, rose 17.9%. After being the worst-performing sector in 2016, healthcare has bounced back this quarter, climbing 9%. Medical-device makers such as Align Technologies ALGNAbbott Laboratories ABT, and Boston Scientific BSX rose double-digits. Gold-rated Vanguard Health Care VGHCX climbed 11.1%.

After rising more than 50% in 2016, Brent crude prices fell 7% to $52.42 for the quarter to date. As a result, the energy sector was down about 7% in the first quarter. Poor performers include exploration and production players Hess HES and Apache APA, as well as drillers Seadrill SDRL and Transocean RIG--all are down double-digits.

Morningstar Style Box Categories
Large-cap funds outperformed their smaller-cap counterparts in the first quarter of 2017. The large-growth Morningstar Category was the top-performing category in the Morningstar Style Box for the quarter to date through March 30, gaining 8.8%. Silver-rated Morgan Stanley Institutional Growth MSEGX outperformed 99% of its large-growth peers with a gain of 16.2%. Strong stock selection in healthcare, consumer cyclicals, and technology helped this fund. Top performers included DNA sequencer Illumina ILMN, auto manufacturer Tesla TSLA, and enterprise software provider Workday WDAY--all were up more than 25% during the quarter. The large-value category didn’t fare as well as large-growth, but it still rose 4.0%. Gold-rated Diamond Hill Large Cap DHLAX gained 6.6%, which beat 97% of its large-value peers. The fund benefited not only from its underweighting to poor-performing energy stocks but also from solid stock selection in the consumer defensive sector, including Kimberly-Clark KMB and Philip Morris International PM.

In the mid-cap space, growth also fared better than value during the quarter: The mid-cap growth category gained 7.3%, while the mid-cap value category was up 3.5%. In the mid-cap growth category, Bronze-rated Baron Growth BGRFX outperformed 90% of its peers with a gain of 10.0% owing to solid bets within financials, consumer cyclicals, and industrials. In the mid-cap value category, Bronze-rated Fidelity Leveraged Company Stock FLVCX outperformed nearly all of its peers with a gain of 7.6%. The fund owned several telecoms that performed well such as Altice ATC and T-Mobile US TMUS. On the flip side, Bronze-rated FPA Capital FPPTX trailed 99% of its mid-cap value peers for the quarter to date, losing 3.8%. The fund was dragged down by power generator Babcock & Wilcox BW, which was down more than 40% during the quarter after missing earnings expectations. The fund was also hurt by its sizable overweighting in energy.

After posting the highest returns of the Morningstar Style Box categories in 2016, small-value and small-blend were the weakest-performing categories for the quarter to date through March 30, 2017, gaining just 0.1% and 1.6%, respectively. Gold-rated DFA US Small Cap Value DFSVX lagged 85% of its small-value peers, losing 1.6% because of its overweighting to the struggling energy sector and its underweighting to the strong-performing utilities sector. Bronze-rated Berwyn BERWX lost 2.7% and underperformed 98% of its small-blend peers. Poor stock selection in consumer cyclicals, as well as its limited exposure to rallying healthcare stocks, dragged on results.

For additional details on Morningstar Categories, visit this Fund Category Performance page. PDF versions of the tables are available: Top and Bottom


Andrew Daniels, CFA, CMA, is an analyst covering equity strategies on Morningstar’s manager research team.

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