6 Medalists Posting Extreme Performance in 2017

How should you look at extreme performance in a fund? There’s a natural emotional response to want to invest more in your winners and dump the losers, but that’s not really a good idea. To illustrate the point, I pulled three of the best- and worst-performing Morningstar Medalists based on year-to-date performance.

Funds are best viewed from a great distance. My preferred time period is over the entire tenure of the lead manager. Failing that, 10- or 15-year time periods are ideal provided the management team and strategy have largely remained intact over that stretch. It takes time for skill to show up in fund records, so don’t look for it in year-to-date returns, which are largely noise.

While short-term results won’t tell you much about skill, they do illuminate what kind of fund you own. One of the first things I want to see with extreme performance is whether it fits what I’d have expected. I would not necessarily expect top- or bottom-percentile performance in any seven-month stretch, but some funds are given to extreme performance and therefore it is less surprising.

Another thing to think about is whether the fund has changed its stripes. Has it departed from what I thought it was capable of? I also want to think about what the performance says about the risks of the fund's style at this point in time. Markets rotate and overvaluations tend to self-correct. Therefore, funds with extreme performance are often good bets to make an extreme move in the other direction.

Let’s start with the top three Morningstar Medalists based on relative performance. Each one is in its peer group’s top percentile.

It’s kind of funny that Royce Opportunity RYPNX would have a big year at the same time that Dennis Lynch’s portfolio is running. For the year to date, Royce Opportunity is up 9.6%, placing it in the top percentile of small-value funds. Small-value funds can be relatively stable and defensive--or they can be like this fund. With big overweightings in basic materials, cyclicals, and technology, this fund tends to jump around the category rankings just like Morgan Stanley Institutional Growth. Its 9.6% year-to-date return is one of the best in the category, but it lost 13.6% in 2015 and also had big losses in 2008 and 2011. Managers Buzz Zaino and Bill Hench simply want cheap stocks, and they clearly don’t mind companies in the midst of a turnaround or industry slump. In short, this fund is doing what you’d expect. In absolute terms, it obviously hasn’t had as big a run as the FANG stocks powering large-growth funds, so I’m not as worried about valuations here.

When equities rally,

And the Laggards