Fund Winners and Losers During Recent Market Rockiness

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The S&P 500 has lost 7% over the past three months and many growth-leaning mutual funds have lost more than that. Joining me to discuss some of the biggest leaders and laggards amid this stretch of volatile performance is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's start with the headlines. When you look at the categories, the diversified, domestic equity fund categories, which have suffered the most in this period of market volatility?

Kinnel: Well, from the three-month perspective, small growth has been hit the hardest. It's down about 14%. Large growth is down about 10%. And as you know, over the last few years, growth has been the best performing area. I take that at least some of that must be just simply a little correction, that they have had such a nice runup, very high expectations. In that way, it makes sense that they might correct the most.

Benz: Has the opposite side of the style box performed relatively better during this period?

Kinnel: That's right. Large value has lost the least. It's down about 6%, which is a big improvement on the growth side. I think some of that is simply that value has been the underperforming area and therefore maybe better set up to lose less in this kind of environment.

Benz: Of course, technology stocks have been kind of ground zero for this recent market volatility. So, I guess, it stands to reason that value funds would have less of some of those companies.

Kinnel: That's right. The FAANGs and some other tech areas have really been hit hard. And so, naturally, value funds tend to have very little exposure to the more aggressive side of tech. They might have some tech, but not the really fast-moving ones.

Benz: Let's talk about foreign stocks. Sometimes when U.S. markets sell off, we see that foreign stocks fall further still. What's been the pattern this time around?

Kinnel: In this case, the foreign equity sell-off has really mirrored what we saw in the U.S. So, pretty comparable performance. The first half of the year was not nearly as good for foreign equity funds; year-to-date, they are down significantly more than the U.S. This later sell-off hasn't been worse. But for the year, it has been worse.

Benz: When we look at sector fund performance, we talked about how the technology sector has been the hardest-hit area. Any other areas of note in terms of performing particularly well or poorly during this time frame?

Kinnel: Energy has been another area that's been hit hard. On the positive side, it's really the defensive areas that generally expect to do well, but it doesn't always work that way, but this time it has in that we are seeing utilities have held up the best. Some other defensive, high-quality consumer names have held up really nicely. It's actually kind of fitting, the basic idea, which is, defensive high-quality names that are slower growth, hold up well and the higher-risk names have sold off.

Benz: We often tell investors to hold bond funds to be a stable portion of their portfolio when we have these equity market shocks. Have they been a good place to be? Have bond funds generally delivered for investors during this time frame?

Kinnel: Only sort of. They have been less bad. Most bond funds have lost about 1% over the trailing three months. In a way, diversification does work but not maybe as well as you'd hope. Bond funds seem to be under pressure. We have a growing deficit, talk of inflation, and that's put pressure on the bond market.

Benz: Have there been safer spots to be within the bond fund space? Shorter-term and higher-quality, I would assume, may have held up a little bit better?

Kinnel: Yeah. Shorter-term and higher-quality has held up a little better in general. We are seeing longer bond sell off the most. So, they have done a little bit better, yes.

Benz: You looked through the performance rankings at some funds that have performed especially poorly during this stretch of weak market performance. Oakmark Select was one that you noted had particularly poor performance recently. What's going on there?

Kinnel: The fund is down about 15% over the trailing three months, and the reason is energy. Bill Nygren has been dialing up his exposure there, and unfortunately, so far, the timing has been bad and that's really stung the fund.

Benz: Fidelity Growth Company, probably not surprising to see that it has struggled recently. It tends to be really heavy on technology stocks, right?

Kinnel: Yes, it's made its shareholders a lot of money with tech stocks. But occasionally, you have to give some of that back. The fund has got a lot in FAANGs; it's got a lot in Nvidia. So, it's taken a rough stretch the last three months; it's lost about 16%.

Benz: You also pointed out some funds that have held up pretty well over this period. I was surprised to see Templeton Global Bond on that list, because it's a volatile fund, sometimes does worse other bond funds in periods of turbulence. What's going on there?

Kinnel: Templeton Global Bond is, as you say, much higher risk than most bond funds because they have got a lot of emerging-markets and currency risk involved. But in this case, where they've been very cautious is on duration. The fund actually has a negative duration, meaning, it actually benefits from rising rates. So, that's helped a lot. It's got a lot of emerging-markets exposure as well. That's been kind of a mixed bag, but better than a lot of other areas. It's actually been a nice performer.

Benz: On the equity side, quality has held up well. So, I guess, it's not surprising that you'd see a fund like Yacktman do relatively well during this time frame.

Kinnel: That's right. Yacktman has an emphasis on quality companies like Procter & Gamble, and those names have really held up well. It also has a big cash stake and, of course, cash does well in a bear market. It's nice to see Yacktman having a rebound. It's another of those funds that's had a rough go of it for a while, but again, we understand the reasons, and this is sort of a proof of concept to see it looking good in a down market.

Benz: Any other funds that kind of stand out to you in terms of having delivered strong performance during this rough stretch?

Kinnel: Merger Fund is a fund that's up about 2.5% over the three months. It's one you kind of expect because it's doing merger arbitrage, it's strategy that is designed to not move with the markets because they are essentially long the acquisition target and short the acquirer. It's really what you'd expect. But it's nice to see it delivering. These kinds of market-neutral type funds have not had much of a chance to deliver in this very strong bull market. So, it's nice to see Merger Fund have its day in the sunshine.

Benz: Useful recap, Russ. Thank you so much for being here to share your insights.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.