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By Russel Kinnel | 11-28-2015 12:00 AM

These Large-Growth Funds Win on Many Measures

Active large-growth funds have struggled to outperform their benchmark recently, but these medalists have delivered, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for 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.

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