A Look Back at Mutual Funds in 2019

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. As 2019 winds down, most mutual fund investors can look back on what has been a pretty good year for the markets. Joining me to provide a recap of the top headlines in the mutual fund world is Russ Kinnel. He is Morningstar's director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's start with a sad story. Jack Bogle passed away in early 2019. That, you say, was really the biggest news item from the past year in the mutual fund world. Ben Johnson also cited it as the top story in the ETF space. Let's talk about why Jack Bogle was such a seminal figure in the investment industry.

Kinnel: Yeah, well, he seized the really rare opportunity to create a mutual fund company owned by fundholders and really create this incredible tight bond between fund owners and the fund company and of course, was a pioneer in low costs, in indexing, and I think really set the standard in a lot of areas for the fund industry. And I think even if you don't own a Vanguard fund, you may well have benefited from what Bogle was able to accomplish because I think he really set the standard, and it was tough for the rest of the industry not to live up to that. And so, I think it's really an amazing accomplishment. And we think back--even in the '90s, Vanguard was not that big a fund company. So, really, it's still a little recent development, even though today it might seem like that it's always been the case.

Benz: And one thing that we're continuing to see is just these massive inflows into very low-cost products, mainly passively managed funds, where of course Vanguard is a leader, and out of some of the more costly actively managed products. Let's talk about that phenomenon. In 2019, it was certainly a major one.

Kinnel: Yeah, that story has continued. It's really been running since the bear market of '08-'09 when a lot of people gave up on active management, and we've really seen that grow as, obviously, the ETF industry has grown alongside that because ETFs have drawn a lot of that passive flows. So, yeah, it's really a big story. An interesting wrinkle this year is we saw passive fixed income and passive foreign equity start to gain some traction, too, not nearly as much, but generally, those have remained the domain of active management. But recently, we've seen a bit of a shift there, and that could be another challenge for active industry.

Benz: Let's discuss performance. I kind of tipped it off at the outset. We have had a really great year in the markets. Can you summarize what has worked especially well for fund investors and areas that maybe haven't performed as well?

Kinnel: Yeah. So, you may recall, 2018, the market lost about 6% of its value, and in a way it's not uncommon to rebound from a down year with an up year. But I think the magnitude is surprising. You're up 30% in large growth, about 25%, 26% in large blend. So, really a pretty strong rally. Also, of the 108 Morningstar fund categories, 106 gained ground in this year. Only bear market and ag commodities, two very small categories, lost money. So, really, you made money in everything, which is great. Obviously, among the leaders, large growth up about 30%. The other side of the style box, small value, was the weakest at about a 21% gain, though that's not as big a gap as we've had in other years, and value's had some moments this year. But again, tech did particularly well. Healthcare did almost as well. So, in some ways, it's the same story.

Benz: Let's discuss some of the news within and among fund companies. One of the big stories was Invesco's acquisition of Oppenheimer Funds. I'd like to get your take, Russ, on whether you think this is a good thing, whether you think this combined company is going to be a strong entity.

Kinnel: Yeah. I was out visiting Oppenheimer not too long ago. And it's interesting to see the change. I think, for investors right now, it's still pretty much a neutral story because all the good managers for the most part are staying where they are. They started with some open-end fund mergers and just announced a raft of ETF liquidations, on the smaller ETFs, they're killing off. But for the most part, the changes are more dramatic behind the scenes like back office, sales staff, and some areas where they're making significant cuts. On the investment side, for instance, and a lot of the Oppenheimer managers and analysts they wanted keep, they signed to a commitment for a few more years with added pay. And so, I don't expect really big changes. And from a big-picture standpoint, it seems fairly neutral to me. I don't think the funds will change much. I don't think we'll necessarily see big fee cuts, which I would love, but I don't necessarily expect that.

Benz: One thing we saw were sizable capital gains distributions from some of the funds where there were changes and that, in turn, triggered some reshuffling of the portfolio since some of these distributions got paid out.

Kinnel: That's right. In some cases, they moved a fund from an Invesco team to an Oppenheimer or the other way around, and then said, "OK, run it the way you ran this other thing." And so, they did that, and that meant getting rid of all the holdings in the old portfolio, and that meant a lot of cap gains. You're right. In one way, it is a negative if you've held some of those funds in your taxable account.

Benz: Another story that you think is significant is Henry Ellenbogen's departure from T. Rowe Price. He had been running T. Rowe Price New Horizons. Let's talk about that--where he went, who's taking over, and how that affects you and how you and the team look at that fund.

Kinnel: Yeah. We talked about how it's been a challenge for active management, but certainly some active management is thriving. And T. Rowe is one of the firm's that's really had a great decade because they've had a lot very good stock selection. They're well managed and pretty good at communicating with shareholders. But this is a tough one because Ellenbogen ran T. Rowe New Horizons, which is a mid-growth fund, very big one that's had tremendous returns, has kind of been a leader on some of their private equity investments. And so, to lose someone kind of midcareer is really tough because there are other T. Rowe managers who are relatively close to retirement. And so, in a way, they could have been expected to lean on Ellenbogen even more. So, it's tough to lose someone midcareer. But of course, when you're a really successful growth manager, there are a lot of possibilities out there. You can do hedge funds, venture capital. There's just a lot of possibilities. So, it's tough to hold on to him. But it is a blow for T. Rowe.

Benz: Do we know what Ellenbogen will be doing?

Kinnel: He's starting his own firm, so not one that individual investors can invest in, unfortunately.

Benz: Russ, thank you so much for being here to recap the past year in mutual funds.

Kinnel: You're welcome.

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