Growth-Stock Funds That Have Stayed Near the Top
These funds have managed to stay in the top third of the large-growth category.
Investors in stock funds loaded up on fast-growing companies can be forgiven for feeling a bit whiplashed by the market for the past couple of years.
Following the pandemic-induced selloff in March 2020, technology shares drove the market’s recovery, and in the process left other sectors behind.
Now, facing stubbornly high inflation and climbing interest rates , growth stocks have led the market decline in 2022. For fund managers who invest in growth stocks and tend to have large portions of their portfolios invested in technology companies, it has proven to be a challenging period.
This change in market leadership has led value funds to far outperform growth funds. But it has also led to flip-flops within fund categories. Many of the growth-stock funds that were the biggest winners during the bounce from pandemic bear market lows, such as Morgan Stanley Institutional Growth (MSEQX), have seen their fortunes plummet in comparison to other funds in their categories.
Still, some growth fund managers have been even to keep their portfolios on a more even keel, successfully navigating through both periods.
To find funds that fared well through the growth-stock rally, the market's peak and recent selloff, we screened through the ranks of funds covered by Morningstar analysts. Splitting the last two years in half, we found only five funds that landed in the top third of their category for both the twelve month periods ending in April 2021 and April 2022. (This data is based on the oldest share class for each fund.)
Here’s how they managed to outperform.
Fidelity Capital Appreciation (FDCAX) gained 56% versus the category average of 51% from May 2020 through April 2021.
Co-managers Asher Anolic and Jason Weiner's tech holdings earned superior gains including their 10-largest holdings: Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Adobe (ADBE), and Qualcomm (QCOM). Weiner says he learned from the 2008 crisis to avoid being too conservative in times of volatility, and leaned into some riskier areas of the markets.
Facing a new environment in the past year, where riskier areas of the market have taken a beating, the fund is down 4.3% versus its peers’ average of 12.1%. Nvidia and Microsoft continue to bolster returns and healthcare picks have helped the fund, including UnitedHealth Group (UNH), Vertex Pharmaceuticals (VRTX), and Eli Lilly and Co. (LLY), Morningstar Direct data shows. Anolic previously served as a drug-stock analyst and ran a pharmaceutical-stocks fund, notes Morningstar senior manager research analyst Bill Rocco.
Year to date, the fund has also outperformed, losing 18% compared with the average decline for large growth funds of 26%.
Anolic and Weiner also manage Fidelity Growth Discovery (FDSVX), which is similar to Fidelity Capital Appreciation (FDCAX), but takes a larger stake in foreign companies. Rocco says the managers devote 10% to 15% of the fund's assets to foreign stocks versus roughly 5% for its typical rival.
“This has been a headwind for the fund,’’ Rocco says, "as foreign growth stocks have lagged their U.S. counterparts for most of the duo’s tenure.” Chinese internet company Tencent’s (TCEHY) 46% decline in the past year has dragged on the fund’s performance. The managers have reduced their exposure to China over the past year. Still, the fund has outperformed, as has its twin, Fidelity Capital Appreciation.
For Baron Partners Retail (BPTRX), its performance is tied to their enormous stake in Tesla (TSLA), which comprises one half of it’s portfolio. It is up 167% for the year ending in April 2021. For the one-year period ending in April 2022 the fund was downt 2.13%.
“Tesla overshadows the rest of the portfolio and effectively controls this strategy's fate,” Morningstar senior analyst Adam Sabban writes.
Zillow (Z), which boosted the fund in the year ending April 2021, but was one of the biggest decliners in the year ending April 2022. Instead, Gartner (IT), FactSet (FDS), and Hyatt Hotels Corp (H) contributed to the fund’s performance. As Tesla has fallen the fund has declined 32% year-to-date versus the 26% average decline for funds in the large growth category.
Allspring Opportunities’ (SOPVX) tilt towards small-cap and value stocks has historically hurt the fund compared to its large growth peers, says analyst Eric Shultz. Yet as value stocks came back into style in early 2021, the fund started to outperform. General Motors (GM) and United Rentals (URI) both gained over 100% in the one-year period ending April 2021. Along with its technology holdings the fund has gained 53.4% from May 2020 through April 2021.
The fund has especially shined over the last year, losing less than half than the average in the category. Its basic materials and consumer defensive picks have held, including Steel Dynamics (STLD) , which has gained 61% the past year, according to Morningstar Direct
Among index-tracking funds, Invesco QQQ (QQQ) and Schwab U.S. Large-Cap Growth (SCHG) have done well in both periods, even though they have sunk to the bottom half of the category for the year-to-date period.
“A handful of the market’s heftiest tech stocks powered much of the market’s climb over the past decade and whether it was Apple (AAPL), Amazon (AMZN), or any of the market’s elite highfliers,’’ Morningstar analyst Ryan Jackson writes. "Invesco QQQ’s narrow portfolio and tech tilt allowed it to take healthier stakes in almost all of them.” Over the past year this has meant Apple, Microsoft, and Tesla have powered the fund as it lost only 6.8% compared to the category average loss of 12.1%. Year-to-date though the fund has posted subpar performance, losing 26.5%, in line with the average fund in the category.
Katherine Lynch does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.