2020: The Year in Funds

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 2020 was a tumultuous year for fund investors. Joining me today to discuss some of the top headlines in the fund industry for the year is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thanks for being here today.

Russ Kinnel: Hey, glad to be here.

Dziubinski: One story for the year would obviously be the ongoing dominance of growth stocks and the funds that invest in them, right?

Kinnel: Yeah, growth has been dominant over value for a very long stretch. But if anything, I probably would have guessed that the roles would reverse in 2020. Instead, it just got even more extreme. The gap between--the typical growth fund up more than 30%, the typical value fund up 1% to 4%. So, the most dramatic gap we've ever seen.

Dziubinski: Russ, what other fund categories outperformed and, conversely, underperformed in 2020?

Kinnel: It was kind of an unusual mix this year. Tech and gold were among the very best performers, which is really weird. You wouldn't expect those two to do well in the same environment. That's really uncommon. And then, on the other hand, energy and utilities were among the worst hit, just as economically sensitive and value stocks in general were very unloved.

Dziubinski: Now, let's pivot over to fund flows. What did we see there in 2020?

Kinnel: This actually reminded me of the recession and bear market in '08-'09 where you saw a huge amount of money going into bond funds and a lot of money going out of equity funds. And that's what we saw again this year, even though obviously returns for most equity funds were far better than bond funds. But I think that safety had a lot of appeal, and of course, lots of investors lost their jobs in 2020. So, from that perspective, it makes a lot of sense. If you lose your job, you're going to think about protecting your capital a little more. But I think it was really dramatic outflows out of equity funds, even though once again we had a really good year for equity funds.

Dziubinski: Let's talk a little bit about managers in 2020. Specifically, did the fund industry see any significant manager changes announced during the year?

Kinnel: Two of the more vulnerable names, very longtime serving managers already well past their retirement ages, announced their retirement. Dan Fuss of Loomis Sayles Bond LSBRX, a multiple Bond Manager of the Year Award winner, who's done a really great job, announced he would be stepping down. And Richie Freeman of ClearBridge Aggressive Growth SHRAX, is someone--a very low-turnover semiconductor-heavy portfolio that he's run since its inception, I believe back in the 80s, is stepping down. And so, it's really an end of an era there, too.

Dziubinski: And then, what about managers and outperformance? Were there any big outperformers in 2020?

Kinnel: Morgan Stanley Institutional Growth had an insane year, up well over 100%. Absolutely crazy. It's always been a very volatile fund. It's a focused fund with heavy emphasis on FAANGs and other social-media kind of plays. But it had a lot of the huge winners that benefited from people switching to working at home, stocks like Zoom ZM, Square SQ, and as well as some of the FAANGs. And so, just an amazing blowout year for Morgan Stanley and Dennis Lynch.

Dziubinski: And then, on the flip side, were there any managers we think very highly of that maybe didn't have the best 2020?

Kinnel: Yeah, Primecap, which, as you know, is one of the managers I like the most in absolute terms, was fine. They returned about a little more than 10%. But in relative terms, way behind the pack, and obviously it's unusual for a firm that has long been a great performer. And I think you can really see the story when you look at the industries. They've long had been a little overweight healthcare and little underweight tech. And prior to 2020, both of those sectors were so great, it didn't really matter. But in 2020, tech really took off and left healthcare in the dust. So, that was part of it. But then they do dabble a little in industrial stocks and in particular had a number of airline stocks. Of course, airlines are among the worst places to be as the world largely shut down on air travel due to COVID. So, just sort of the industry mix really worked against them in 2020.

Dziubinski: Well, Russ, thank you so much for the 2020 recap and Happy New Year.

Kinnel: Happy New Year.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.