Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Active funds in the large-cap growth category have had a difficult time beating their benchmark in recent years. Joining me to discuss that phenomenon and to share a few funds that have bucked that trend is Russ Kinnel--he is director of fund research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: So, in the November issue of Morningstar FundInvestor, you wrote about how large-cap growth funds are having a difficult time beating the Russell 1000 Growth Index. Let's talk about why, in your view, that is.
Kinnel: I think there are a couple of issues. One of them is that there's a bit of a mismatch. The Russell 1000 Growth Index is kind of a pure growth index, very heavily weighted to the largest companies, whereas in the fund universe, the large-growth category, you'll see funds that have a lot in large blend, they'll have stuff in mid-growth, maybe even some mid-blend. So, there is kind of a less-pure, more-pure issue. And in a year like this year, when large growth is the best place to be in the Morningstar Style Box, the funds in the category are going to lag because they are less pure than that index.
Benz: So, if I'm looking at a large-growth fund that I might have in my portfolio, how should I benchmark? It sounds like you think the Russel 1000 Growth isn't necessarily the best yardstick. What should I be looking at?
Kinnel: I would look at both peer group and that benchmark because we see, versus the benchmark, the success rates really fluctuate wildly. So, I think it's worth looking at both. Together, you kind of get the best answer.
Benz: So, in this issue of FundInvestor, you pointed to some funds that looked good using a measure called Sortino ratio. Let's talk about what that metric is and why it's different than just looking at raw returns.
Kinnel: It's one of the better risk-adjusted-return measures. It's not too different from the ones we probably know better like the Morninstar Rating for stocks and the Sharpe ratio, but there are some positive advantages. The basic idea is, let's look at a risk-adjusted return, which is particularly important in large-growth where obviously there can be a lot of risk. You can have some very aggressive funds that, say, at a time like now when you've had almost a seven-year run for large-growth, they can look really good, but then you miss the fact that there is a lot of risk there. So, I think, particularly after a long run, you want to make sure you're looking at what the risk-adjusted returns are tell me as well as the straight returns.Read Full Transcript
Benz: And maybe think about tilting a little bit perhaps toward some of the more cautious entrants in the category.
Kinnel: That's right. Think about caution, think about your overall portfolio, and understand that--particularly in large growth--it can be feast or famine. You go through these amazing three-year returns, and then you have these horrible three-year returns. So, it's definitely a volatile group.
Benz: So, let's dial in and look at some of the specific funds that you talked about in FundInvestor. Let's start with T. Rowe Price Blue Chip Growth (TRBCX). It has a manager who has been onboard for a long time--in fact, back to when I was an analyst.
Kinnel: Yeah, Larry Puglia has been at the helm 22 years, and I love that because you have such a known commodity. We know what he is going to; we know how much value he has added over time. And in this case, the fund really is a pretty fit with the Russell 1000 Growth because it really does invest in a lot of those biggest names. A lot of the names you're most familiar with are going to be featured prominently. But over time, he has actually done better than the index and the peer group, and I think that's really noteworthy, especially when you have such a long-tenured manager that you really know well.
Benz: You also screened for whether a fund was a medalist or not, and this one is rated Silver by our analysts.
Kinnel: That's right. I looked for funds that were medalists and had beaten peers and the index as well.
Benz: So, this one gets a Silver currently.
Kinnel: That's right.
Benz: Another fund--a very well-known name--Fidelity Contrafund (FCNTX) also made your list. It's also a Silver-rated fund. Let's talk about that one for the few people who aren't familiar with it.
Kinnel: Well, it's worth talking about because we know it so well sometimes we leave it off these lists. But Will Danoff is still there just doing a great job.
Benz: Twenty-five years, in his case.
Kinnel: Twenty-five years, doing what almost seems impossible--running over $100 billion in active large-growth strategies and beating peers and index remarkably consistently. I think very few managers can do what he does. The only reason it isn't a Gold is because he is running so much money, and that's obviously a handicap. I think he'd be doing far better if he had less to run. But even with that handicap, he is still doing a great job. So, sometimes the obvious answer is a good one. Contrafund, obviously, is in a lot of 401(k)s, and it's worth owning.
Benz: The last fund that I wanted to talk about is perhaps a lesser-known fund. It's Laudus US Large Cap Growth (LGILX). Let's talk about that one. It's under the Schwab umbrella.
Kinnel: That's right. It's definitely off the beaten path a little. It's a Schwab fund but subadvised by Lawrence Kemp's team at BlackRock. He has run the fund for most of the last 13 years. He actually switched firms, and so that meant there was about a year and a half where he didn't run the fund. But his strategy is more focused than the other two portfolios we are talking about. This is about a 50-name portfolio, some aggressive growth along with some more steady growth. He has also done a consistent job. But I think it's nice to have the focus there. He really gets to know his companies well. He has just done a really good job. We mentioned there is a cautious element with the steady-growth side as well as the aggressive growth. That's a good thing. So, the fund might hold up better in the next downturn.
Benz: So, you mentioned, though, it's a compact portfolio. If I own it or if I'm looking at it, is it something that I'd want to augment with maybe, say, a total market index or something that's better diversified?
Kinnel: Well, I certainly wouldn't want this to be my only large-cap holding. I think you'd definitely want something else--whether that's some other value fund or a total stock market. I think you want that, whereas something like Contrafund is so diversified you might conceivably just hold that. But I think you'd definitely want something else. He does at least avoid having it all in aggressive growth because that would make it really risky. But I think you're right, you definitely want something to offset that--whether it's a total-market or a straight value fund or something like that to pair with this fund.
Benz: Russ, thank you so much for being here to share your insights.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
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