Christine Benz: Hi, I'm Christine Benz from Morningstar.com. For most U.S. investors, large-cap equity funds take up the lion's share of their equity portfolios. Joining me to share some of his favorite large-cap actively managed equity funds is Russ Kinnel. He's Morningstar's director of manager research.
Russ, thank you so much for being here.
Russ Kinnel: Glad to be here.
Benz: Russ, when we look at fund flows, we see investors are sending the clear signal that the large-cap space is an area where they're saying, "I might as well just buy a cheap index fund and call it a day." That's a reasonable way to go, right?
Kinnel: Absolutely. I think the bar has been raised for all funds. There are some really good low-cost active funds and good low-cost index funds, and you can be picky. Yeah, I think, absolutely: Passive is a fine option here.
Benz: You could potentially use an active fund to augment an index fund, it doesn't have to be either/or.
Kinnel: That's right. A lot of investors have a mix of active and passive, and I think certainly, you can do that. Large cap as well: You can have a total stock market, and then add in a value or growth fund--however you want. There's a lot of different ways to slice it.
Benz: So you hinted that cheap is the name of the game. So if I'm looking at actively managed products and I want to make good selections, what's kind of the upper limit I should put on expense ratios if I'm looking at large-cap funds?
Kinnel: Well, I suppose 1% is a simple rule of thumb. But you could also drive it down more if you want, 90 or 80 basis points. There are good active funds below all of those price points.
Benz: You brought a short list of funds that you and the team like quite a bit. One is T. Rowe Price Dividend Growth. This one kind of lands toward the mild side. Let's talk about Tom Huber, who's been running the fund for quite a long time, and why you like this strategy and some other factors in place here.
Kinnel: Sure. Tom Huber, as you said, has been running the fund since 2000. I always like it when you've got a manager with that kind of track record because you can go back and look at all of the calendar years, know that the manager owns all of that. It'll help you to set expectations for both the upside and the downside. The dividend-growth strategies are kind of a good idea because in order to find dividend growers, you've got to look for companies with good balance sheets, good growth prospect, as opposed to if you're looking just for yield, you might go for companies with not such great prospects but have really high yields. I think this is actually good, kind of defensive discipline, so it's a good strategy, as you say. Leads to mild-mannered results, kind of higher-quality companies, so that generally, in downturns, this kind of strategy is going to lose less than the market, as a whole.
Benz: And as you hinted, Russ, this fund is not set up to deliver current income. So if you're someone who wants a 3% yield, or something like that, you're not going to get it here. It has a dividend growth strategy, so it's looking for companies with a history of increasing those dividends.
Kinnel: Yeah, much more modest yield, something closer to the S&P. But, all in all, it's a really strong package, and we rate it Silver.
Benz: OK, and expenses are pretty cheap, too. Let's talk about Primecap Odyssey Growth. First, when I think of the highest-conviction management teams among you and the analyst team, it seems like this Primecap team is one you really like. Let's just talk about what attributes are in place that you find so appealing.
Benz: Yeah, I actually own three Primecap funds.
Benz: I own one.
Kinnel: I'm a big fan, and I think they just are outstanding fundamental investors. You've raised the idea of passive and active at the top. I think I would hate to have to give up investing with Primecap because they just go really deep into their fundamental analysis with a really experienced team. So you've got very experienced analysts and managers who are just outstanding stock-pickers. This fund is large-growth. Nearly all of Primecap's funds are large-growth. One concern is they are running a very large sum of money if you put all of their funds together. But they just do an outstanding job and at a reasonable fee.
Benz: These funds do run, though, to the more aggressive edges of the fund universe. They definitely have risk controls, but they will be volatile at various points in time.
Kinnel: That's right. Growth has done so well lately that, if you just look at the last couple of years, you might not see that risk. But if you look longer-term, you'll see the fund is going to give money back on occasion. It's not a low-risk fund, certainly when value does well or when growth has a sell-off. These funds will get hit. They have a lot of money in tech and healthcare, so certainly not low-risk. To me, it's a long-term investment that could pay off very nicely.
Benz: Primecap Odyssey Growth is open to new investors. A lot of the funds aren't. Let's talk about why that is actually a little bit of a plus--that they are trying to constrain asset flows on some of the funds that they run.
Kinnel: That's right, they do. They have closed some of their funds, which is good, because the sum of all the money they're running is quite large. The only one's that are open are this fund--Odyssey Growth--and Primecap Odyssey Stock. There are three from Vanguard--are all closed. So they take a relatively prudent approach to managing assets. That is a welcome thing because, again, you want their stock picks to shine through.
Benz: So we've got one in large-blend, T. Rowe Price Dividend Growth, one in large-growth, Primecap Odyssey Growth. Your third large-cap pick is in the large-value space. This is American Funds American Mutual. First, before we get into what you like about it, let's just talk about its availability because some investors might see this and say, "Well, I don't have an advisor. I don't want to pay sales charges." Let's talk about the accessibility of American Funds.
Kinnel: That's right. We probably, most of us, know the A shares from American Funds the best, and that is the one with the front load you buy through an advisor. But they also have F1 shares that are available through No Transaction Fee supermarkets without the load. They typically run about 5 to 10 basis points more than the A shares. But the A shares are priced pretty cheaply, so it's still actually a pretty attractive deal. They are now accessible to just about everyone.
Benz: So let's talk about this fund in particular, American Mutual. It has a focus on dividends, and like all American funds, it employees a multimanager setup, where these managers run a component of the portfolio.
Kinnel: Yeah, the American Funds' way is to have managers who operate independently--each has a sleeve. You might have, say, seven or eight managers with a sleeve. And then another sleeve might be dished out to the analysts, say, 15% or 20% of AUM might be in the analysts' hands. So essentially, a bunch of people building this portfolio together. Some of the managers might be running fairly concentrated funds but, by the time you build out across all those managers and the analysts' portfolio, you get to a fairly diversified portfolio. As you mentioned in this case, yield's important to them. They also want industry leaders, so they're not going to the extreme ends of yield. They want good companies at decent valuations, too.
Benz: And they avoid certain types of stocks, alcohol and tobacco stocks.
Kinnel: That's right, sort of an ESG-lite. They do have some screens. It's not really what you would call a full ESG fund, but it has long had this alcohol/tobacco screen.
Benz: Russ, I know Morningstar viewers and readers really like to get your recommendations. Thank you so much for being here.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz from Morningstar.com.