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Fund Spy

U.S. Stock Funds Say Goodbye Bull Market, Hello Volatility at Quarter-End

Investors grappled with record-breaking volatility in a historic quarter.

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Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

The longest running bull market in history ended days after its 11-year anniversary in mid-March. The S&P 500 lost 21% from Feb. 20 to March 27, as investors struggled to process the economic implications of the coronavirus pandemic.

There were few places to hide as stocks posted broad losses. Less than 5% of companies in the S&P 500 posted gains from the market’s Feb. 20 top through March 27: biotech firms Regeneron Pharmaceuticals (REGN) and Gilead Sciences (GILD), Kroger (KR), and Clorox (CLX). Energy stocks fell the hardest as the global economy ground to a near halt and Saudi Arabia and Russia undercut each other with their oil production and pricing decisions. Transportation and recreation stocks, such as airlines, hotels, and cruise lines, plunged as travel all but ceased, and consumer defensive, healthcare, and technology shares fell, but not as far.

Some pre-coronavirus crash trends persisted: Large caps outperformed small caps and growth outperformed value. For the year to date through March 27, large growth’s 16.9% average loss was the least of the nine Morningstar Style Box categories. Small value’s 37.6% decline was the worst. U.S. stocks continued to fare better than non-U.S. stocks. The Russell 3000 Index lost 22.2% for the year to date while the MSCI ACWI Ex USA Index fell 24.2%.

The Least Worse-Off
On an absolute basis, there were no winners this quarter; even the best-performing equity funds lost money. Morgan Stanley Institutional Growth (MSEQX), which has a Morningstar Analyst Rating of Bronze, held up the best of any rated equity fund with a 4.1% year-to-date decline through March 27. Lead manager Dennis Lynch’s high-conviction approach invests heavily in technology and healthcare, including companies poised to benefit from society’s abrupt shift to remote work and social interaction, such as videoconferencing company Zoom (ZM) and online collaboration tool maker Slack Technologies (WORK), which both rose in the quarter. Amazon.com (AMZN) and Shopify (SHOP), two of the fund’s top-five holdings, also gained as more homebound consumers shopped online. A small position in biotech stock Moderna (MRNA), one of the firms trying to develop a coronavirus vaccine, helped as well.

Technology sector funds fared better than most. Silver-rated AllianzGI Technology (DRGTX) lost 8.7% for the quarter through March 27 but had solid picks among IT services and software providers such as cybersecurity firm Akamai Technologies (AKAM) and enterprise collaboration software maker Atlassian (TEAM). Silver-rated BlackRock Technology Opportunities (BGSIX) fell about as much, but benefited from non-traditional tech stocks such as Tesla (TSLA), which ran up early in the quarter, and healthcare technology picks like Ping An Healthcare and Technology (PANHF), and Teladoc Health (TDOC).

Silver-rated Harbor Capital Appreciation’s (HACAX) lack of energy, financials, and industrials exposure and its above-average tech stake helped it. Subadvisor Jennison Associates’ Sig Segalas and his team have a history of strong stock-picking in technology and consumer cyclical stocks, and that once again served the fund well this quarter. Netflix (NFLX) and Tesla provided a cushion, as did graphics chipmaker NVIDIA (NVDA). The fund lost 13.3% for the year to date, but that beat most of its large-growth Morningstar Category peers.

The Worse-Off
Funds that focused on hard-hit sectors, such as energy and financials funds, got crushed. Neutral-rated Ivy Energy (IVEIX) lost 62.4%, worse than nearly 80% of peers; Bronze-rated Vanguard Energy (VGELX) lost 43.9%, but that was better than most of its rivals; and Silver-rated Davis Financial (DVFYX) lost 34.3%, which was about average for its category. Diversified funds with large helpings of both sectors performed as poorly or worse. Hotchkis & Wiley Mid Cap Value (HWMZX) was near the bottom of the pack for U.S. equity funds and its Morningstar Analyst Rating is currently Under Review. The fund’s long-standing, aggressive, and, as yet unsuccessful bet on energy stocks added insult to injuries sustained in recent years. The fund’s big financials stake didn’t help either. The fund lost 47.3% for the quarter, owing to sharp declines from stocks such as Kosmos Energy (KOS), Cairn Energy (CRNCY), and Citizens Financial Group (CFG).

Small-value funds’ woes continued. Silver-rated LSV Small Cap Value’s (LSVQX) 43.4% decline ranked in the bottom decile of the small-value category. The fund’s quantitative model looks for stocks trading at steep discounts, which often leads it to deeply out-of-favor stocks, including some with limited balance sheet flexibility that the sell-off has punished as investors have fled to cash-rich firms that may have better chances of surviving the sudden drop in business activity. The managers’ low turnover, systematic approach means they are far less nimble than the typical peer, and many of the model’s picks were in the downturn’s worst-performing industries. The coronavirus pandemic’s impact on travel sank positions in United Airlines (UAL), Spirit Aerosystems (SPR), and hotel operator Hersha Hospitality Trust (HT).

Gold-rated Primecap Odyssey Growth (POGRX) fared worse than most of its large-growth peers. While its energy underweighting and technology overweighting helped, its heavy exposure to airlines and cruise ship companies hurt. American Airlines Group (AAL), Southwest Airlines (LUV), Royal Caribbean Cruises (RCL), Carnival (CCL), and Norwegian Cruise Line Holdings (NCLH) each posted major losses. The fund’s aggressive, benchmark-agnostic approach has generated excellent long-term results, albeit with bouts of volatility. The managers are willing to invest in controversial stocks if they feel the long-term fundamentals are strong, including bank Wells Fargo & Co (WFC), one of its biggest detractors this year to date. The fund has tended to gain ground in rallies but has a history of losing more than the index in downturns, and its 24.8% decline for the quarter trailed the Russell 1000 Growth’s 15.9%.

Nick Watson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.