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By Christine Benz and Shannon Zimmerman | 03-10-2014 04:00 PM

Stock Funds: The Five-Year Rally's Big Winners

Small was large and consumer cyclicals ruled on the performance charts, but after a period when nearly everything did well, what's the next move for stock-fund investors?

Christine Benz: I'm Christine Benz for

It's been five years since the market bottomed following the financial crisis. Joining me to discuss fund performance trends since that date is Shannon Zimmerman, associate director of fund analysis for Morningstar.

Shannon, thank you so much for being here.

Shannon Zimmerman: Good to be with you, Christine.

Benz: Shannon, let's start with the big picture headline. If you had purchased a domestic equity mutual fund on March 9, 2009, how would you have done since that date if you had bought and held and reinvested your dividends and capital-gains distributions?

Zimmerman: Remarkably well, almost irrespective of where you had put your money.

Benz: Throw a dart almost.

Zimmerman: Almost. In fact, in terms of the broad U.S. categories, and the sector categories as well, there was only one that didn't have a nice double-digit return. It was flat to the market. We'll talk about that in a little bit.

It's been a remarkable five-year period. Five years ago, today, as a matter of fact, we were at the start of a rally that is now 5 years old, which is long by historical standards. Nobody knew at the time, of course.

But to your question, even if you were invested in the worst category among the style box-based categories on the U.S. side five years ago, you did remarkably well. Large-cap value, which is at the bottom of the list of the nine style box-based categories, returned 24% annualized over the last five years. So, if you had $10,000 at the beginning of that period, you have around $30,000 now, basically triple your money over that period in the worst-performing category.

Benz: So even if you picked wrong, and were all large-cap value, you still would have done very, very well.

Zimmerman: Even if you picked wrong, you picked right.

Benz: Let's dial into style box performance a little bit more. You say that size--the capitalization size--was the big determinant in performance; style was not as significant.

Zimmerman: Yes. If you look at the data among the diversified categories on the U.S. side, that certainly seems to be the case. There was a persistent bias over this period for small cap over large. Less so, but there's also a pronounced bias in terms of the market's valuation spectrum. If you look at the list of the nine style box-based categories by performance: At the very top, small value, small blend, small growth. Down from there, the next three spots, are all the mid-cap categories, and it's the same order in terms of the valuation sequence: value, blend, growth.

Once you get to the bottom of the performance list, where the large-cap categories all clustered, it's the reverse: Growth beats blend, which beats value. But if you look back at the small- and the mid-cap categories, the margin of victory in terms of valuation spectrum is very, very narrow compared certainly to what you see on the market-cap side.

Benz: How about when you look at sectors, funds that focus on a specific sector or even diversified funds that tend to favor specific sectors? Which sectors were the good spots to be in over the past five years?

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