The Year in Funds

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 2021 was another successful year for the U.S. stock market and for funds that invest in it. Joining me today to discuss the year in funds is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi Russ. Nice to see you.

Russ Kinnel: Glad to be here.

Dziubinski: Let's start out a little bit about talking about fund flows in general in 2021. What were the trends?

Kinnel: Overall, we just had massive flows across the board, but the real story is passive once again dominating. Passive took in about three quarters of the money coming into funds, just about everywhere across the board--bonds, domestic stocks, foreign stocks. Munis were about the only place where active took in more than passive.

Dziubinski: And then, let's pivot over to performance for a minute and focus on U.S. stock funds first. Which categories did best, which maybe didn't do as well, and why?

Kinnel: For a change, value had its day. So, categories like small value, value sectors like energy and financials did really well. And, of course, the reason is we had the economy crashing in 2020, starting to come back in late 2020, then going really strong in 2021. And so, economically sensitive sectors and value came back strong. On the flip side, emerging markets and long bond funds were mostly in the red.

Dziubinski: Speaking of emerging markets, let's talk a little bit about international stocks and international-stock funds in general relative to U.S. stocks and U.S. stock funds. How did they do?

Kinnel: Relatively poorly. So, that one long-running theme has continued. U.S. equity funds mostly had returns in the double digits, in the 20s, whereas international-stock funds were more like 5% to 10%. And there were two main reasons. One, the U.S. economy was stronger than most of the other economies but also a strong dollar meant that effect was magnified because, of course, most funds don't hedge their currency. So, a strong dollar will diminish returns in a foreign fund.

Dziubinski: And let's talk a little bit about fixed income. In general, how did fixed-income funds do? But then, were there particular categories that maybe did surprisingly well or not so well?

Kinnel: Yeah, the specter of strong economy, rising inflation, and the Fed potentially raising rates made it for a tougher year for bond funds. A lot of bond funds lost money, especially long-term bond funds. On the flip side, those that did best were those that fight inflation or interest-rate risk--that is, TIPS, bank-loan funds, high-yield funds, high-yield munis. Those all had nice gains.

Dziubinski: Let's talk a little bit about some high-profile funds in particular that might have had surprisingly good years.

Kinnel: Yeah, Oakmark Select and Dodge & Cox Stock, again, continuing with our theme of a value rebound, these are funds that, though they have blend stocks as well as value, they've really had fairly light investments in traditional growth sectors, but they had a lot in financials and others that have really come back strongly. So, Oakmark Select and Dodge & Cox after having a bit of a rough stretch have really come back strong in 2021.

Dziubinski: And what about some funds that are high profile and notable but that maybe struggled a little bit in 2021?

Kinnel: ARK Innovation really got smacked. It gained over 100% in 2020. So, it's not too big a surprise it would give some of that back in 2021. As a lot of the growth names have gotten hurt, particularly, some of the plays like Zoom and others whose growth was based in part on working from home. Another fund that we like that did poorly, we like it a lot more than ARK, is Alger Small Cap, but another fund that's exposed to very fast-growing stocks that also finished in the red.

Dziubinski: Let's talk a little bit about some fund manager changes in 2021. Perhaps the biggest was the announcement from Fidelity just a few weeks ago that Joel Tillinghast was going to be retiring, not tomorrow, but a little bit down the road, from Low-Priced Stock. Talk a little bit about what we think of that retirement and any others that you think are particularly noteworthy for 2021.

Kinnel: Sure. I think this is a really unique manager transition because what Tillinghast was doing was unique--running a massive portfolio focused in mostly small- and mid-cap names with nearly 1,000 names in the portfolio. So, I think there's going to be a real challenge, which is why we downgraded the fund from Silver to Bronze. Sam Chamovitz and Morgen Peck are good managers, but this is a really big challenge for them to run. So, we still like the fund, but you've got to recognize that not everyone is Joel Tillinghast. Very few people can do what he did.

Another prominent change I would highlight is T. Rowe Price Blue Chip Growth, where Paul Greene took over for Larry Puglia. We feel a little bit better about that manager transition. We've got it rated Silver because the strategy will be the same and Greene is a good, experienced manager with a good track record.

Dziubinski: Russ, lastly, gaze into your crystal ball for 2022. What might fund investors see?

Kinnel: Well, I mean, I think some trends are very certain to continue, and that is: declining fees, flows continuing to go toward passive, and the ETF world continuing to grow. We've had a pretty good run here. So, certainly, there's the potential for the market giving something back, and I think all eyes are really going to be on the Fed because the Fed might actually raise rates and that's a big deal. It's been a while since the Fed had to do that. So, I think you're going to spend a lot of time listening to people talking about those sort of macro issues. But of course, as investors, we can control our own individual plan and that's what's really important is: Even if the macro story shifts, you want to keep your eyes on your plan and stay on target.

Dziubinski: Well, Russ, thank you so much for your time and for your perspective today. And I look forward to talking with you more in 2022.

Kinnel: Sounds good.

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