3 Growth Funds That Are Better Than They Look

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Small- and mid-cap growth funds have been laggards this year compared to funds in other domestic style box categories. Joining me today to discuss why and discuss a few well-regarded funds in these categories that are struggling this year is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thanks for being here.

Russ Kinnel: Glad to be here.

Dziubinski: Let's talk a little bit about the performance of smaller- and mid-cap growth funds this year. They've fallen behind larger-cap funds and behind value funds. What's been going on here?

Kinnel: I think it's just kind of a pause after a really nice run. They had a great 2020, with companies that were once small caps, like Zoom, etc., taking off. So, it seems like we're just kind of giving some of that back. But also on the value side, some of those sectors like financials and energy are going on strong, which leaves the small- and mid-growth funds out in the cold.

Dziubinski: Russ, let's pivot and talk a little bit about some funds in particular that are highly rated in the small and mid-cap growth categories but that are kind of slumping this year, the first being Harbor Small Cap Growth. We assign it a Morningstar Analyst Rating of Bronze, and it's landing in the small-growth category's bottom quartile. What's going on there?

Kinnel: This is a fund that's subadvised by Westfield. And it's a very good fund, but biotech has been really hurting the fund this year. If you play in small-cap biotech names, it's almost inevitable that there's going to be a year when a few of them blow up on you or at least take a big hit because these are among the most volatile stocks, and that's just sort of baked into the story. We do still like the fund. This isn't changing our views of the fund, but it is having a rough year.

Dziubinski: Now, another well-regarded small-growth fund that we also assign a Bronze rating to is Artisan Small Cap, and that one is even doing more poorly. It's landing in its category's bottom 5% so far this year. What's been going on there?

Kinnel: This is a fund that's very aggressive, likes to find companies that are growing fast and are about to grow even faster due to a catalyst. That means pretty high valuations and therefore almost all tech and healthcare. Put all that together, it means these are companies that are very vulnerable to bad news because so much good news is priced in. In this case, a few of their names have disappointed, and that's really hurt the fund bad this year.

Dziubinski: Moving up the market-cap ladder, we have Jackson Square SMID-Cap Growth, and it earns a Bronze rating for some of its share classes and a Silver rating for its other share classes. And it's bringing up the rear in the mid-cap growth category this year. What's been going on with that fund?

Kinnel: You know, it's funny because it's got sector weights and valuations pretty much in line with the category, so you wouldn't expect a big swing, except that it's a very focused portfolio of just 30 names, and that's what's going on here, a few of those top names have been hit. There's no real theme to those names, but they've been hit pretty hard, and that's really hurt the fund this year.

Dziubinski: Well, Russ, thank you for your time today and for giving us some perspective on what's been going on with small- and mid-cap growth funds. We appreciate it.

Kinnel: You're welcome.

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