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U.S. equity markets kept climbing in 2020’s fourth quarter, making for a strong close to a crazy year. The passage of a second coronavirus relief bill and rollout of COVID-19 vaccines strengthened expectations in a swift bounceback from the pandemic, boosting the S&P 500 index to 33 all-time highs. It ended the year at a record 3,756, up 12.2% in the final quarter and nearly 20% for the year. From the index’s March low, it gained 65.2%. Growth funds across the market-cap spectrum posted the biggest gains, while value continued to underperform.
The rally was concentrated in several sectors. Consumer cyclicals posted the largest individual stock gains last year, particularly in Internet retail. Etsy ETSY gained 301.6%, and Amazon.com AMZN saw its market cap increase 78.2% to become the index’s third-largest constituent. Electric-auto manufacturer Tesla TSLA, a synecdoche for post-pandemic exuberance, increased more than sevenfold last year to become the most valuable automaker; it joined the S&P 500 as its fifth-largest constituent on Dec. 21. With nearly half its assets in the stock, Baron Partners BPTRX, which has a Morningstar Analyst Rating of Bronze, rode Tesla’s rapid rise to post the largest gain of any equity fund in Morningstar’s coverage universe: 148.5%.
Tech stocks accounted for about half of the S&P 500’s returns. Semiconductor firms Nvidia NVDA and Advanced Micro Devices AMD led the way, gaining 122.2% and 100.0%, respectively. The average fund in the technology Morningstar Category gained 55.9%. Morningstar Medalists BlackRock Technology Opportunities BGSIX and T. Rowe Price Global Technology PRGTX did even better, landing in the category’s top quartile with 86.6% and 75.6% gains, respectively. Both take a broad view of the tech universe and have flexibility to move outside their benchmarks. As a result, both benefited from Amazon's and Tesla’s gains, while payment processors PayPal Holdings PYPL and Square SQ boosted the BlackRock fund and electronic-gaming firm Sea SE was T. Rowe’s top contributor.
Other sectors didn’t see such success during the rally. The much-discussed healthcare sector increased a relatively modest 13.0%. A steepening yield curve boosted financial services in the fourth quarter but not enough to end the year in the black. The average fund in the financial Morningstar Category lost 1.2%. JHancock Regional Bank FRBAX fell 10.1% as regional banks continued to underperform their larger, more diversified rivals. Emerald Banking & Finance HSSAX, whose share classes get Morningstar Analyst ratings of Bronze and Neutral, also invests heavily in regional banks but is more diversified across other industries. Gains in credit services and mortgage finance firms helped offset losses and power it to an 11.9% gain and top-quartile finish to the year. Energy lost a third of its value after oil prices imploded in the spring, significantly weighing on results for those exposed to it, such as Hotchkis & Wiley Mid-Cap Value HWMAX--whose 16.0% energy allocation was the largest of any diversified U.S. equity fund in Morningstar’s coverage--leading to results in the bottom half of its mid-value category.
Style, rather than size, played the bigger role in 2020. Growth stocks continued their years-long dominance against value, despite value taking a brief lead in the fourth quarter. The Russell 1000 Growth Index gained 38.5% last year, versus the Russell 1000 Value’s meager 2.8%. Small caps followed suit, too, with the Russell 2000 Growth’s 34.6% gain beating its value counterpart’s 4.6%. Large caps held up much better than mid-and small caps in the first-quarter bear market, but the disparity disappeared by the end of the year. Indeed, the Russell 2000’s 20.0% gain edged the S&P 500 and Russell MidCap by 1.6 and 2.9 percentage points, respectively. Overall, buoyed by low bond yields and unprecedented support from governments and central banks, equity markets continued to focus on growth despite considerable economic uncertainty.
Some funds under Morningstar’s coverage were well positioned to benefit from last year’s trends. The growth-led market helped the aggressive Fidelity Growth Company FDGRX land in the fifth percentile among large-growth Morningstar Category peers. Steve Wymer, veteran manager of the strategy whose share classes get Morningstar Analyst Ratings of Silver and Gold, looks for companies whose resilient business models can fuel above-average top-line growth, particularly in rapidly expanding tech and healthcare niches with distinctive products or pricing power. Consequently, it held up relatively well during the bear market and outperformed in the subsequent recovery, gaining 67.5%--nearly twice that of the Russell 3000 Growth Index and average category peer. High-conviction stakes in Nvidia, Apple AAPL, Tesla, and out-of-benchmark e-commerce platform Shopify SHOP were the biggest contributors.
Funds less exposed to growth struggled, including Royce Premier RYPRX. The Neutral-rated strategy was out of step last year as its modest growth tilt and perennially light healthcare stake kept it from catching strong tailwinds in these areas. As a result, it posted results in the bottom decile of its small-growth Morningstar Category, gaining just 11.5% versus the Russell 2000 Growth’s 38.7%. Further, its picks in the hot tech sector were lukewarm relative to the index’s tech holdings.
Extreme volatility earlier in the year also created opportunities for funds that could take advantage of it. The opportunistic, Silver-rated AMG Yacktman Focused YAFFX beat the Russell 1000 Value Index by 14.5 percentage points in 2020 to land in the top percentile of large-value Morningstar Category peers. The managers accumulated cash in recent years when attractive opportunities were scarce but feasted on volatility in the first-quarter bear market, picking up hard-hit small- and mid-cap names at deep discounts, such as Huntsman HUN and MSC Industrial Direct MSM. A multiyear position in Samsung Electronics Co. Ltd.’s preferred shares supplied the biggest boost of the year to the portfolio, though. The eclectic style has done well following other drawdowns, such as in 2008 and 2011. This year was no exception.
Despite a dramatic November reversal in which the Russell 2000 Value Index outperformed growth--posting its best monthly gain since its 1978 inception--the year was still another tough one on the whole for value investors. Janus Henderson Small Cap Value JSCOX (which gets Bronze and Silver Analyst Ratings depending on the share class) had a particularly difficult time. Its 7.0% decline ranked in the bottom decile of small-value Morningstar Category peers. A tiny cash position provided little ballast or dry powder in the bear market. Stock-selection woes in the consumer cyclical and financial-services sectors were the key detractors. Apparel companies like Steve Madden SHOO, Kontoor Brands KTB, and Carter’s CRI failed to keep pace with the consumer discretionary sector’s gains, while the portfolio’s many regional banks experienced sharper loses than their counterparts.