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2012's Top Performers

Here's what has worked, and what hasn't, so far in the year to date.

Shannon Zimmerman, 07/12/2012

Amid persistent volatility, the path to relative success so far in 2012 has generally led through the market's more growth-oriented areas. Among Morningstar's diversified domestic-equity categories, large-growth funds have fared best as a group for the year to date though July 9. Further down the market-cap spectrum, mid-cap growth and small-growth funds have, on average, bested their blend and value-focused counterparts, too.

The performance advantage that growth has enjoyed in the year's first half is apparent at the sector level as well. Two large-growth focused SPDRs, Technology Select Sector SPDR XLK and Consumer Discretionary Select Sector SPDR XLY, have led the way, with each exchange-traded fund enjoying double-digit gains on the year. At the other end of the performance spectrum are the market's more value-focused areas. While SPDRs tracking the utilities, industrials, and materials sectors are all in positive territory, none of those ETFs--each of which runs with a large-value portfolio--has cracked 5% for the year to date.

Elsewhere, Energy Select Sector SPDR XLE, another ETF with a large-value lineup, has shed nearly 5% in 2012, amid energy prices that have steadily declined since hitting a peak last March.

Financial Highfliers
Against that backdrop, the year-to-date success of the value-leaning financials sector is somewhat surprising, at least at a glance. Indeed, Financial Select Sector SPDR XLF has climbed by double digits.

Among Morningstar's diversified domestic-equity peer groups, Bruce Berkowitz's financials-besotted Fairholme FAIRX is the year's top-performing fund, although with nearly 30% of its $7.4 billion asset base invested in AIG AIG as of February--and with roughly 75% of assets plunked down on the financials sector overall--Fairholme and its portfolio of just 19 holdings isn't especially diversified relative to category rivals.

Berkowitz is a terrific investor, of course, and the Morningstar Analyst Rating of Silver that Fairholme has earned underscores our conviction that the fund is likely to outperform over the course of a full market cycle. Still, with a portfolio whose debt/capital ratio hovers near 45% and a relatively moat-free collection of holdings, the fund would almost certainly stumble if capital markets were to freeze up or if persistent worries about the economy caused investors to stampede into higher-quality stocks.

With shareholders continuing to yank money out of Fairholme, moreover, Berkowitz could be at least temporarily hamstrung if such calamity strikes, although the fund’s recently increased cash stake would help cushion the blow. Still, to succeed with Fairholme, and in the relatively unhealthy financials sector at large, investors should have heavy exposure to patience.

Robust Health Care
Along with financials and real estate, health care has also been a surprising pocket of strength in the growth-led year-to-date period.

Shannon Zimmerman is an associate director of fund analysis at Morningstar.
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