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The Winners and Losers of U.S. Equity Funds in 2014

It was a great year for Primecap and a bad one for Fairholme.

It's been a fine year to be in large caps. Although small caps have had the upper hand in most of the past 10 years, that hasn't happened in 2014. The average large-blend fund gained 9% compared with 0.3% for small blend and 5% in mid-blend. (Figures are through Dec. 10, 2014.) Why the difference? Valuation is certainly one part of the story. Many years of outperformance left small caps looking pricey by many measures. GMO's Ben Inker said at our June conference that he wouldn't touch small caps with a 10-foot pole and he may have been on to something.

Growth versus value was more or less an even draw, though value was a more treacherous place to be as the industry look below explains.

The sector differences were even more dramatic. Health care repeated its role from 2013 as the best place to be with an average return of 27%. After that, a pair of higher-yielding equity sectors, real estate and utilities, enjoyed robust returns of 27% and 14%, respectively. Technology also enjoyed a 11% gain. On the downside, oil's plunge drove natural resources stocks off a cliff in the second half of the year. With oil prices down to $60 or so a barrel, it's no surprise that equity energy would be down about 20%, natural resources down 15%, and equity precious metals down 7%.

How a fund was positioned within sectors and market cap explained a lot. So with that in mind, let's dig into the winners and losers.

One quick caveat: I write below about the best and worst performers in the year, but that hardly tells you whether you should buy or sell a fund. See our analyst ratings page to get our take on a fund's long-term prospects.

Winner: Growth Funds That Like Health Care
Primecap's growth funds are all fond of health care, including biotech, and they produced returns between 15% and 20%, all topping nearly all of their peers.   ClearBridge Aggressive Growth (SHRAX) and  Amana Growth (AMAGX) also rode health care to a big year.

Loser: Growth Funds That Love Twitter and Hate Health Care
Dennis Lynch's team at Morgan Stanley made a mint with the Twitters and Groupons of the world in 2013, but in 2014 they gave some back as the market decided that Twitter's shares had gotten a little frothy.  Morgan Stanley Institutional Small Growth (MSSGX) shed 14% in the year to date.  Mid Growth (MPEGX) was down 1.3% and  Growth (MSEQX) gained 5%, which was still bottom quartile.

Winner: Funds With Big Tech Weightings
Not every tech name was a winner but many were.  Apple (AAPL),  Microsoft (MSFT), and  NVIDIA (NVDA) were among the best performers and  Fidelity OTC Portfolio (FOCPX) had them all, leading to a 16% gain. The fund is benchmarked to the Nasdaq, so it sort of has to have a lot in tech.  Amana Growth (AMAGX) had Apple, too, along with  Adobe (ADBE) and Akami, leading the fund to a 13% gain.

Loser: Funds With No Tech and a Lot in Fannie Mae/Freddie Mac and Sears
OK, I stretched when I made that plural as  Fairholme (FAIRX) is the only one I know that fits the bill. Its Fannie Mae and Freddie Mac preferreds are down 55% and Sears is down 14%. Fannie Mae and Freddie Mac common shares are also in the portfolio and they're down 19% and 18% for the year, respectively. Ouch. The fund's down 4% this year, though it had an awesome 35.5% gain in 2013.

Loser: Micro-Cap Funds
Naturally in a year when bigger is better, you'd expect micro-cap funds to have a tough year. Aegis Value (AVALX) is down a brutal 24% for the year to date.  Perritt MicroCap Opportunities (PRCGX) and  Royce Opportunity (RYPNX) lost about 4% each.  Heartland Value (HRTVX) is down 2.4% and  DFA US Micro Cap (DFSCX) is off 1%.

Winner: Mid-Cap Value Funds at the Higher End of Mid-Caps
Not many Mid-Cap Value funds had impressive returns, but  American Century Mid Cap Value (ACMVX) and  JPMorgan Mid Cap Value (FLMVX) returned 14% and 12%, respectively. The funds have quality biases in their strategies and that led them up in market cap and away from some of the value names that got burned. Oddly, many of the large-cap quality funds lagged in 2014.

Loser: Funds With a Lot in Small-Cap Tech Stocks
Small-cap tech was a dangerous spot this year. Just ask shareholders of  Conestoga Small Cap (CCASX), which is down 11% in the year to date thanks largely to its 43% tech weighting. Lots of small tech names are in the red this year.  Artisan Small Cap Value , with 22% in tech, is down 10% and the aforementioned Royce Opportunity has 28% in tech.

Loser: Funds With a Big Stake Overseas
A strong U.S. economy and weakness in Europe and Japan spurred the dollar to a big rally. That was bad news for funds with big foreign-equity stakes.  Royce Low Priced Stock  had 32% overseas and it lost 6%. Other funds with big foreign equity stakes that landed in their category's bottom quartile include  Franklin Mutual Beacon (BEGRX), T. Rowe Price Spectrum Growth (PRSGX), and  American Funds New Economy (ANEFX).

Winner: Xenophobic Funds
 JPMorgan Mid Cap Value (FLMVX) doesn't own any foreign stocks, and that was a tailwind. Likewise for  RS Value (RSVAX),  Schwab Core Equity (SWANX), and Invesco Small Cap Growth (GTSAX).

Winner: S&P 500 Funds
Naturally in a year when bigger is better, S&P 500 funds will outperform total stock market funds.  Vanguard 500 Index (VFINX) is top quartile for the year to date, while  Vanguard Total Stock Market Index (VTSMX) is second quartile and  Vanguard Extended Market Index (VEXMX) is in the third quartile.

Winner: Funds With the Right Financials
It wasn't a bad year to own financials.  Fidelity Mid Cap Value (FSMVX) had a number of winners including  Allstate (ALL),  AmTrust Financial Services , and  Navient (NAVI).

Loser: Funds With the Words Marketocracy, Bread, or Footprints in Their Names.

Loser: Funds With Really High Fees
Nysa Fund charges a 5.41% expense ratio, and it lost 42% in the year to date. Pacific Advisors Mid Cap Value charges 3.69% and lost 14%.

Loser: Funds With Big Energy Stakes
Yeah, that hurts.  FPA Capital lost 5% due to a big energy weighting. Schwartz Value (RCMFX) is down 7% and Towle Deep Value (TDVFX) is down 3%. Calamos Dividend Growth (CADVX) is flat due to its 24% energy bet in a year when dividend growth has been a pretty good strategy.

Loser: Funds With Astronomical Turnover
Birmiwal Oasis has turnover of 2,000% and lost 22% in the year to date. The fund with the next highest turnover, Quantified All-Cap Equity lost 3% with a sluggish turnover rate of 1,327%.


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Russel Kinnel has a position in the following securities mentioned above: FAIRX. Find out about Morningstar’s editorial policies.