Trying to be Large-Value in a Large-Growth World

Growth investors have had plenty to smile about the past three years. The Russell 1000 Growth jumped a cumulative 71.5% from October 2016 through November 2019, led by tech or tech-related names such as Microsoft MSFT, Apple AAPL, and Amazon.com AMZN. Value investors, on the other hand, haven't done nearly as well. The Russell 1000 Value lagged nearly 35 percentage points behind its flashier peer for the period. To be sure, value stocks have faced headwinds. Traditional value sectors like energy and financials have suffered, respectively, from weak oil prices and low, fluctuating interest rates. Some Morningstar Medalists have navigated this well; others have been caught in the doldrums. Let's look at the performance of four Morningstar Medalists in the large-value Morningstar Category since earning their current rating. American Funds American Mutual AMRMX has been a stellar option since earning a Morningstar Analyst Rating of Gold in March 2012. The conservative fund favors dividend-payers but will hold cash or cash equivalents like short-term Treasuries at times. This approach tamps down volatility and buoys the fund in down markets. It held up well in 2018's fourth-quarter sell-off, dropping only 8% versus the typical peer's 12.5% loss and the Russell 1000 Value's 11.7% decline. Such durability contributed to the fund's 11.4% annualized return from April 2012 through November 2019, beating most of its peers while posting strong Sharpe and Sortino ratios— two measures of risk-adjusted returns. Long-term holdings Microsoft and Verizon Communications VZ were winners over that span. Diamond Hill Large Cap DHLAX is a solid value strategy. The managers are disciplined in calculating firms' intrinsic values and selling winners that reach their valuation estimates. That drove the fund's rating upgrade to Gold from Silver in April 2014. Since then, the fund's nearly 10% annualized return through November 2019 topped all but a fraction of peers. Capable stock-picking in industrials, including a 2014 Worldpay investment that culminated in the company's 2019 acquisition by a competitor, powered results. The fund has sparkled in 2019. Its 29% rise through November outshone 97% of peers. A few growthier names like Microsoft and Facebook FB helped, but it also got strong performances from financials such as Citigroup C and Discover Financial Services DFS. BNY Mellon Dynamic Value DAGVX offers less downside protection than American Funds American Mutual, and sometimes the contrast is stark. The fund, formerly known as Dreyfus Strategic Value, fell 15% in 2018's final quarter, lagging more than 80% of peers. Unlike their American Funds counterparts, this fund's managers like to be fully invested, removing the cash buffer. They're also willing to make large sector bets relative to the Russell 1000 Value. As such, the fund tends to be more volatile than peers, and that's hurt since the fund earned a Silver rating in November 2017. From December 2017 through November 2019, the fund gained a modest 5.7% annualized, trailing most of the category. An above-average stake in basic materials and little exposure to real estate detracted during the period. Reflecting the relative weakness in value equities overall, all-cap Vanguard US Value VUVLX has languished since getting a rating upgrade to Silver from Bronze in January 2018. It rose a cumulative 1.9% from February 2018 through November 2019, even as the Russell 1000 Value gained almost 9%. The fund's small-cap exposure was partly to blame, including an 89% decline in the shares of struggling drugmaker Mallinckrodt MNK and a 79% cut in menswear retailer Tailored Brands TLRD. It also suffered from softness in energy names, including large caps Occidental Petroleum OXY and Exxon Mobil XOM.