3 Great Funds Having a Lousy 2023

Susan Dziubinski: We’ve reached the final innings of 2023. Today, we’re taking a look at three top-rated mutual funds and ETFs that underperformed their peers this year.

Before we get into the specific names, first a reminder about Morningstar’s Medalist Rating for funds. Just because a fund or ETF earns a high rating doesn’t mean that we expect it to outperform year in and year out. Instead, funds that earn our highest rating of Gold are those that we expect to outperform their peers or a relevant benchmark on a risk-adjusted basis over a full market cycle, not over a single year. The three funds we’re talking about today all earn Morningstar Medalist Ratings of Gold, and their 2023 performances are landing in the bottom 20% of their respective Morningstar Categories. They’re great funds whose strategies are simply out of step with the market this year.

3 Great Funds Having a Lousy 2023

1. Vanguard Long-Term Bond Index VBLLX BLV
2. T. Rowe Price Dividend Growth PRDGX TDVG
3. Primecap Odyssey Growth POGRX

The first great fund having a lousy 2023 is Vanguard Long-Term Bond Index VBLLX BLV, which is available as both a mutual fund and as an ETF. This passive fund tracks the Bloomberg Barclays Long Government/Credit Index, which includes Treasuries, government-related bonds and investment-grade corporate bonds with at least 10 years until maturity. This fund is far more sensitive to interest rates than its peers. It holds more than twice as much of its assets in interest-rate-sensitive Treasuries than the average fund in its category. It also has a much longer duration (which is a measure of interest-rate sensitivity). Given that interest rates have risen during the better part of 2023, the fund has gotten clobbered. But it remains a fine choice for investors who are looking for exposure to high-quality, long-term bonds at a low price.

The second great fund having a lousy year is T. Rowe Price Dividend Growth PRDGX TDVG, which is an actively managed fund that’s available as a mutual fund or an ETF. Dividend-paying stocks of all kinds, both high-yield stocks and dividend growth stocks with more modest payouts, took it on the chin in 2023, which left funds focused on dividend stocks in the dust. Relative to other funds in the large-blend category, T. Rowe Price Dividend Growth holds overweight positions in sectors that underperformed this year, like financial services, healthcare, and consumer defensive. And the fund’s portfolio is underweighted in rallying technology stocks, too, which hurt performance in 2023. Nevertheless, we still think this fund is a fine choice for investors looking for exposure to dividend growth stocks. T. Rowe Price Dividend Growth is managed by a long-tenured manager who has done an astute job over time of finding dividend growth stocks from companies that are both financially healthy and competitive.

The last great fund having a lousy 2023 is Primecap Odyssey Growth POGRX; as disclosure, I own Primecap Odyssey Growth in my personal account. It’s an actively managed large-growth fund from a well-regarded growth-oriented money manager. The fund stands apart from the typical large-growth fund by keeping its mega-cap-stock exposure modest when compared to other funds in the Morningstar large-growth category. Instead, Primecap’s investment team often pursues out-of-favor companies with smaller market caps and brighter prospects than the market recognizes. As a result, the fund is light on 2023′s “Magnificent Seven” stocks—in fact, the only Magnificent Seven stock among its top 10 holdings is Microsoft MSFT. And that has really held back the fund’s performance this year compared to other large-growth funds. It remains a fine choice for investors who are looking for exposure to large-cap growth stocks outside of the style’s mega-cap names.

Morningstar strategist Robby Greengold, senior analyst Stephen Welch, and analyst Ryan Jackson provided the research behind this segment.

Watch “3 Great Funds for Contrarians in 2024″ for more from Susan Dziubinski.