The tech rally and value slump have been headwinds for these Morningstar Medalists, but don't count them out.
This article was originally published in the July 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
The biggest risk facing investors today may be FOMO--fear of missing out.
With most stock and bond market indexes posting solid gains and volatility muted, investors have had little to fear from losses this year: All but a few dozen funds in the Morningstar 500 finished 2017's first half in the black.
The biggest gains among diversified funds were had by pure growth funds like Fidelity Growth Company FDGRX and T. Rowe Price Blue Chip Growth TRBCX, each rallying nearly 20%, partly thanks to red-hot technology stocks.
Investors holding funds with more-subdued returns may feel as if they're missing out, but they should remember many of 2017's winners looked pokier in 2016. Inevitably the cycle turns, and funds posting more-modest results will have an opportunity to shine. The Morningstar Medalists discussed below have been laggards this year, but they are likely to excel in more-favorable climates.
Growth funds with no exposure to the so-called FAANG stocks--Facebook FB, Apple AAPL, Amazon.com AMZN, Netflix NFLX, and Google (now known as Alphabet) GOOGL--haven't kept pace with rivals that have piled into the stocks. Jensen Quality Growth's JENSX exacting standards rule out all but Apple from its portfolio. (The Jensen team requires its picks to have generated returns on equity above 15% for 10 consecutive years.)
ClearBridge Aggressive Growth's SHRAX Richie Freeman and comanager Evan Bauman don't share the same criteria, but they prefer stable over rapid growth and pay close attention to price, putting them out of step with racier markets like 2017's. Both funds will often trail their large-growth counterparts over shorter stretches, but they have delivered strong results over the long haul.
After a strong 2016, small-value stocks fell from favor in 2017's first half. Vanguard Small-Cap Value Index VSIAX was flat, and with a strategy of systematically targeting smaller, cheaper stocks, DFA US Small Cap Value DFSVX and DFA US Micro CapDFSCX were especially exposed to the Morningstar Category's slump. As smaller, cheaper names rebound, so should the DFA funds.