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Benz: The 4 Biggest Investment Surprises of 2015

Christine Benz
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Christine Benz--she's our director of personal finance--and she's going to share her four biggest investment surprises of 2015. Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: Your first surprise is the continued dominance of growth stocks. Why is this surprising to you? 

Benz: Well, our analysts have been thinking that the market, in aggregate, is maybe looking a little bit overvalued--maybe a little less so right now but certainly, earlier in the year, all of their research was pointing to the market being slightly overvalued. And at some point in such environments, growth stocks hand it off to value, and value stocks start to outperform. The reason that didn't happen, I think, owes in large part to the energy sector, which has really weighed on value funds, in particular. We've seen really strong outperformance: The Russell 1000 Growth Index is up about 7% year to date; the Russell 1000 Value Index is down about 3% for the year to date through mid-December. 

That's surprising to me given the point we are at in the current rally. Also, the breadth of the strength in growth stocks is somewhat surprising to me. There's been a lot written about the strength in just a handful of technology stocks and how that's driven a lot of the Nasdaq's performance; but really, when you look across growth sectors even, you see strong performance beyond the technology sector. You see that companies like Home Depot (HD) have performed very, very well; a handful of the pharma names have performed well; McDonald's (MCD) has performed well. So, the strength and performance hasn't just been concentrated in those big tech names that everyone seems to be talking about.

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Glaser: Coming into the year, we already were talking about the Fed potentially raising interest rates. We thought that could cause some trouble in fixed income, but it wasn't where you expected.

Benz: Right. I think everyone has been so focused on duration risk and taking interest-rate risk and what will happen to long-dated bonds when the Fed finally takes action. What's been surprising to me is that the drama in the fixed-income market so far in 2015 has really been concentrated in the junk-bond sector. This, again, gets back to some of the weakness that we've seen in the energy and basic-materials spaces, where some of those issuers have really found themselves under pressure. It's in those areas that junk bonds have begun to contract in terms of performance.

So, we've seen some weakness there. I'm not sure a lot of investors expected this--certainly, I did not expect to see that weakness, especially given that the economy is reasonably OK. We usually think of junk bonds performing relatively OK in such environments as well. But I think, perhaps, we all underestimated the weakness of the energy sector and the knock-on effects across the equity and bond markets.

Glaser: Another surprise is that U.S. investors seem to be fighting their home bias. 

Benz: This has been surprising me for a few years now, Jeremy. When we look at fund flows, which I'm kind of fascinated with, one thing we see is that investors seem to be buying foreign-stock funds despite the fact that foreign-stock funds have badly underperformed U.S. equity for several years running. I'm not really sure why this is the case. I think one reason may be that financial advisors are increasingly in charge of fund flows, increasingly determining where investors are placing their bets. And I think advisors, perhaps rightfully, are suggesting that with the U.S. market rally having run on so long that investors should perhaps put some more money into the foreign-stock side of the ledger.

Glaser: And finally, some erstwhile conservative funds seem to have gotten themselves into trouble this year.

Benz: Yes. I think Sequoia is probably the marquee name when we think of a very good quality fund--certainly a terrific management team in charge of this fund. But it's a fund that has been dragged down by some company-specific bets. Valeant Pharmaceuticals (VRX) has been the big problem spot at this fund. At one point in the year, it was a very large holding, and it was responsible for some of that fund's relatively weak performance.

AMG Yacktman Fund (YACKX) is another fund that I think of as a very good quality fund--certainly a high-conviction fund for our analyst team--that has surprised us with its poor performance in 2015. Again, there have been some weak stock picks dragging it down--[Procter & Gamble (PG)], Twenty-First Century Fox (FOX). A handful of holdings have been responsible for its relatively weak showing in a market environment where I might have thought a fund like that would perform well. Yacktman typically holds its ground in weak markets. It hasn't done so in 2015.

We like both of these funds quite a bit; they're both rated Gold, currently. But it is a reminder that anytime you have a strategy like the ones these two funds employ with lots of concentration and lots of conviction in individual holdings, you're going to have these periods of short-term volatility.

Glaser: Christine, thanks for joining me today.

Benz: Jeremy, great to be here.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.