Christine Benz: Hi. I’m Christine Benz for Morningstar.com We’re four months into 2013, and stock-fund performance has generally been quite strong. Joining me to provide a recap of the year to date in fund performance is Shannon Zimmerman. He is 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 discuss some of the best-performing categories year to date.
Zimmerman: So far year to date, and this through the end of April, what you see among the diversified domestic-equity categories here at Morningstar, value has trumped growth and larger has trumped smaller. But not to a fund. There certainly are some outliers, and we’ll talk about a couple of those in a minute. But so far anyway, if the pattern persists, it looks like this is going to be a good year for value.
Benz: But, nonetheless, strong performance really across the board.
Benz: So even though you’ve been better off in value and maybe large caps versus small, even if you had a small-growth fund, you're still looking at positive returns for the year to date.
Zimmerman: Everyone's a winner.
Benz: So, in terms of the value categories that have performed best, is it large value at the top of the heap?
Zimmerman: Large and mid, they're sort of close by. [There have been] double-digit returns so far on the year for those.
Benz: So what do you think is driving that trend?
Zimmerman: So a couple of things. I think that on the one hand, you hear it from a lot of pundits and some fairly talented money managers who’ve been at this for quite a while that the market does look pretty fully valued. This is a lengthy bull run. In some ways, it’s approaching the time that people are going to start calling it a historic bull run.
Benz: Four years really with some bumps along the way.
Zimmerman: Exactly. I think that for a lot of investors, and for lot of analysts, frankly, it doesn’t feel that way because we’re still sort of shell-shocked from 2008. So, while we fell so far, surely we’re going to need some time to get back to where we should have been if it hadn’t happened. But still by historic standards, this is a lengthy bull run. So a lot of folks, pundits and talented money managers, are saying the market looks pretty fully valued. So that may be one way of explaining why value has trumped growth so far this year.
Benz: So in that environment people are looking to some of those companies they perceive to be cheaper.
Zimmerman: Exactly right. Those are the more fertile areas of the market to find opportunities that don't look so overpriced. The other thing, and you and I were talking about this a little bit before this segment started, the dividend bubble: Is there one, or is there not one? We’re going to be talking about that at the upcoming Morningstar Investment Conference. But the higher yields on the value side relative to growth may be driving that, as well because investors have been sending money into dividend-paying securities for quite some time now.
Benz: Let’s look at some of the growth categories because even if you happen to have a certain growth fund, you haven’t necessarily underperformed. There are, in fact, some growth funds that have done really well.
Zimmerman: Sure. I wanted to talk about two of those. One is Vanguard Capital Opportunity, which just recently reopened after being closed for over nine years. And it's run by the team at Primecap, a very talented group of money managers. They run a number of funds, all of them are quite strong. This one was closed for nine years. It’s open now. It has about $9 billion in assets, so it’s not a small fund by any stretch of the imagination. But our analyst who covers it for the fund research group, David Kathman, says it’s one of the best growth funds out there, and I tend to agree. David has given the fund a Gold Analyst Rating, and I think that that’s certainly warranted.
Benz: There are funds available directly through Primecap, Primecap Odyssey Aggressive Growth and a couple of other ones. Why would I look at that Vanguard fund versus the other Primecap funds that have been open and are, in fact, small than this Vanguard fund that just reopened?
Zimmerman: Maybe it's in your 401(k); that is one reason. You should note, too, that Vanguard is keeping it closed to all channels except the brokerage platform. But it’s a good question. Primecap runs a number of funds. Like I say, all of them are quite strong, and they’re smaller. But even at $9 billion for a large-growth fund, that's not a huge amount of money. It has about 125 stocks in the portfolio, so it’s pretty diversified in terms of numbers of names, as well. And maybe you’re just a Vanguard investor. I mean, certainly the expense ratio is very attractive at this fund. I think it’s about 48 basis points relative to a large-growth average of about 130 basis points. So it’s attractively priced, run by a very talented team, and maybe you have all your money under the roof at Vanguard and you want to keep it there.
Benz: Another fund you wanted to talk about, Shannon, this is a ClearBridge fund. It’s a broker-sold fund, an advisor-sold fund.
Zimmerman: That’s right.
Benz: Let’s talk about how it has kind of also bucked this trend toward growth underperforming. It's actually done very, very well year to date.
Zimmerman: That’s right. So both of these funds, they’re in the large-growth category, which as we were saying earlier, has not been the hot spot in terms of relative performance. These are two of the top-performing funds so far year to date. This is ClearBridge Aggressive Growth. It’s been run since its inception in 1981 by Richie Freeman, and it is accurately named. It is an aggressive-growth fund. ClearBridge is actually an affiliate of Legg Mason. For the most part, they’re fairly buttoned-down. They err on the side of caution. They really want to make sure that they don’t blow investors up. But this fund is quite aggressive. It has a 10% position in its top name, which is Biogen Idec, and most of the assets are really stuffed into the top holdings. Courage of your convictions is a cliche, but in this case it really does hold because Richie Freeman and his co-manager, Evan Bauman, really do have a lot of confidence in the names that they have put into the portfolio and have had in the portfolio for years, decades. The typical turnover rate is less than 10% at this fund and that has been a boon, of course, for the fund’s tax efficiency in addition to having terrific trailing returns just in terms of total returns. The aftertax performance of the fund has been strong, too.
Benz: Any time I see a fund with a manager with a 30-plus-year track record, I start wondering about succession strategy and will this manager decide to hang it up. What's your take on that particular situation for this fund?
Zimmerman: Well, it’s an excellent question. I have to say that I interview the team there probably twice a year, I guess. Richie Freeman, who is the lead manager, shows no signs of wanting to retire. He loves managing money, and he loves baseball. But Evan Bauman had served as an analyst on the fund for many years prior to becoming a named comanager. We haven’t really talked about succession per se because again really there’s no hint that that’s even in the offing for Richie Freeman. But I would imagine that Evan Bauman would be the one to take over the fund, should Richie Freeman decide to retire.
Benz: Last question for you Shannon. We’ve had relatively strong gains or strong gains in absolute terms, certainly, for stock funds really across the board so far in 2013. So I think at times like this investors start buzzing about whether it's time to maybe sell in May and go away, pocket what you’ve managed to earn, and maybe hunker down and cash for a while. What's your take on that question, and what do the data show about that sort of strategy?
Zimmerman: My take on it, to use a technical term, is it’s goofy. Any kind of arbitrary investment decision that isn't based on an assessment of the fundamentals of your holdings in your portfolio or maybe it's some embrace of mean reversion--you’re going to trade out of the parts of your portfolio that have done the best and are going to trade into maybe the parts that haven't done so well, on the theory that mean reversion will work its magic and over time the parts of the portfolio that were down will have further upside--if it’s based on that, then that makes sense. And you're exactly right; we have been on a really nice bull run, as you were saying, for years now. And so people may be of the view that, "You know what, the market looks more than fully valued to me, and I want to reduce my equity exposure."
Benz: So see if rebalancing is in order right now?
Zimmerman: It could be. That will be a sensible decision. To just arbitrarily, mechanically say, "All right, well, it’s May. Time to sell my stock portfolio and get back at some later date." That doesn't make a lot of sense to me, and the data certainly in recent years do not bear that out. In fact, May has been in the top half of the monthly returns for the S&P 500 for the last 35 years. So it's not a bad month. The back half of the year may be a little slower, but beginning with May through the end of the year in December, every month has a positive average return over the last 30 years, except for September, which is marginally off.
Benz: Well, thank you so much for providing that perspective, Shannon. Thanks for being here.
Zimmerman: Glad to be with you. Sure.
Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.