Remarkable performances amid a remarkable year.
Last year was a great year to be a stock fund manager but a challenging one for fixed-income fund managers. For our 2013 Morningstar Fund Managers of the Year, greater exposure to equity-sensitive markets, deft security selection, and diversification paid off. Some winners benefited by adding to bets that had been unpopular in preceding years. Others benefited by placing enough different bets that the ones they got right offset those they didn't.
A quick markets recap puts our winners' performances into context. Domestic equities led the way, with the S&P 500 Index returning a remarkable 32.4%. Small- and mid-cap stocks did even better, and health care and tech were the places to be. International equities as measured by the MSCI EAFE Index rose 22.8%, as the eurozone's continuing woes weighed on improving sentiment. Emerging markets struggled, with the MSCI Emerging Markets Index losing 2.3%.
Equity- and credit-sensitive fixed-income fare shone. The average convertibles, high-yield, and bank-loan funds gained 21.7%, 6.9%, and 5.7%, respectively. Rising yields took a toll, with the Barclays U.S. Aggregate Bond Index ending the year with a 2.0% loss. Funds taking on greater duration, significant government exposure, or non-U.S. dollar exposure posted mid-single-digit to low-double-digit losses. Commodities and precious metals brought up the rear with steeper losses.
Beyond a great year in 2013, our winners must be Morningstar Medalists, must have generated strong long-term risk-adjusted returns, and must be strong stewards of investor capital. While our Fund Manager of the Year awards are recognition of past contributions rather than predictions of future results, we're confident in each one's long-term prospects because of their deep research resources and willingness to stick with their discipline in good times and bad. We wouldn't expect repeat performances in 2014, as our winners and their rivals will wrestle with lofty equity valuations, policy-related volatility, a still-recovering economy, and the specter of rising rates.
Domestic-Stock Fund Manager of the Year 2013
Dennis Lynch and Team From Morgan Stanley Institutional Growth MSEQX
Morningstar Category: Large Growth
2013 Return/Category Return Rank: 48.6%/1
Morningstar Analyst Rating: Gold
The Morgan Stanley Growth team, led by Dennis Lynch and comanagers David Cohen, Sam Chainani, Armistead Nash, Alexander Norton, and Jason Yeung, are being recognized for their stellar efforts on their quartet of Gold-rated funds, the $2.0 billion Morgan Stanley Focus Growth AMOAX, $1.2 billion Morgan Stanley Institutional Growth MSEQX, $7.8 billion Morgan Stanley Institutional Mid Cap Growth MPEGX, and $2.5 billion Morgan Stanley Institutional Small Company Growth MSSGX.
While the team invests in a number of areas that shone the brightest in 2013--such as technology and biotech--Morningstar's attribution data suggests the team's individual stock picks fueled the funds' performance. The team's decisions to scoop up or add to a number of controversial, beaten-down holdings during the second half of 2012, including Facebook FB and Groupon GRPN, paid off as those holdings rallied to beat the band in 2013. Early 2013 purchases including Tesla MotorsTSLA and Medidata Solutions MDSO gave the funds an additional boost.
Over time, the team's flexible research approach, including astute pre-IPO investments, has generated superior results on an absolute and Morningstar Risk-adjusted basis. Flexibility can be a two-edged sword, but Lynch has done a remarkable job forging a cohesive culture and sheltering his team from the ups and downs of its parent, Morgan Stanley MS. Lynch takes a rather high-risk approach, but he's executed it brilliantly.