Miss Out on the ‘Magnificent Seven’? You’re in Good Company

In 2023, just seven large-cap stocks accounted for much of the market’s gains. The so-called Magnificent Seven—Alphabet GOOGL, Amazon.com AMZN, Apple AAPL, Meta Platforms META, Microsoft MSFT, Nvidia NVDA, and Tesla TSLA—are widely held, but not all large-growth funds joined in the fun. As a result, some otherwise attractive strategies posted relatively poor results for the year, but investors shouldn’t give up on them too quickly.

Until this year, Calvert Equity CSIEX, which has a Morningstar Medalist Rating of Bronze, looked every bit the rising star. Combining environmental, social, and governance insights with a more traditional focus on profitable, competitively dominant, and steadily growing businesses, the fund finished in the top 20% of the large-growth Morningstar Category in four of the five calendar years from 2018 through 2022. But subadvisor Atlanta Capital’s managers like to look beyond the largest companies and tend to cap top positions at just 5% of assets apiece. Those preferences put the fund at a disadvantage in 2023. Indeed, it entered the year holding only Microsoft and Alphabet out of the Magnificent Seven, with the Microsoft position at less than half the index’s weighting (4.0% versus 10.5%). It did not add any of the other five. As a result, the fund trailed 95% of peers for the year. But the Atlanta Capital team has stuck both to its approach and many of the high-quality companies that drove its astounding run before 2023, and those traits continue to make it a solid long-term option.

The five managers of Gold-rated Primecap Odyssey Growth POGRX have their own styles, but they all target overlooked growth stocks. They also want to see rapid earnings growth, which some well-established companies like Apple now struggle to produce. Thus, the fund entered 2023 with just 4.5% of assets in five of the Magnificent Seven: Alphabet, Meta, Microsoft, Nvidia, and Tesla. Those same stocks made up 19.8% of the Russell 1000 Growth Index at the time (and about 30% now). So, the fund largely missed big rallies in Nvidia and Meta—the Magnificent Seven’s two biggest gainers in 2023. To be clear, the mega-cap misses weren’t the fund’s only mistakes. It was also very heavy on healthcare, where the fund’s big position in Eli Lilly LLY benefited from excitement about weight-loss drugs, but other holdings (such as Biogen BIIB and FibroGen FGEN) sank. Volatile performance doesn’t faze Primecap’s seasoned and talented managers, however, and they have usually rewarded patient investors.

We have known for a while that Silver-rated MFS Massachusetts Investors Growth Stock MIGFX has a defensive profile that it inherits, in part, from its managers’ discipline on valuations. Little wonder, then, that in recent years the fund hasn’t invested in Tesla or Amazon—two stocks with relatively high P/E ratios. It also avoided Meta and didn’t get into Nvidia until October 2023 after that company started to reap huge rewards from its leading position in artificial intelligence hardware. These decisions made 2023 ugly for MFS Massachusetts Investors Growth Stock. But widening the aperture reveals a different story. The managers’ caution on valuations helped the fund so much in 2022′s rough market for growth stocks that its modest 0.2% cumulative gain from Jan. 1, 2022, through Dec. 31, 2023, mostly kept pace with the Russell 1000 Growth and bested 82% of peers. Arguably, then, this strategy did what it was designed to do: It held up better in 2022′s market turmoil and showed restraint in 2023. That’s a fine formula for success over time.

This article first appeared in the January 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.