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The Year in U.S. Stock Funds

Value is back.

Securities In This Article
PRIMECAP Odyssey Aggressive Growth
Carter's Inc
Exxon Mobil Corp
Marathon Oil Corp
Block Inc Class A

U.S. equity markets rose in 2021’s final quarter for a strong close to a year marked by continued uncertainty. The emergence of the coronavirus delta and omicron variants led to steep pullbacks in late September and December. At the same time, strong demand, pandemic-related supply-chain woes, and increasing energy prices drove inflation to its highest levels in nearly four decades, leaving markets on edge awaiting the Fed’s policy response. All told, the Morningstar U.S. Market Index gained 9.4% in the fourth quarter and 25.8% for the year. Other major indexes posted similar results.

Energy Rebounds

All sectors posted sizable double-digit gains in 2021, but the Morningstar US Energy Index stood out with the largest, 55%. A surge in demand from COVID-19-pandemic lows pushed oil prices to their highest levels in several years. Exploration and production firms led the way: Continental Resources CLR, Devon Energy DVN, and Marathon Oil MRO each rebounded from large double-digit declines in 2020 to finish 2021 up more than 145% each. The two largest U.S. oil companies, Exxon Mobil XOM and Chevron CVX, each reported their most profitable quarters since the start of the pandemic. For the year, they gained 57% and 45%, respectively.

Several value funds benefited from the energy rebound. Hotchkis & Wiley Mid-Cap Value HWMAX, a contrarian, deep-value strategy that typically invests in some of the market’s most out-of-favor areas, had about 20% in energy, the most in the mid-cap value Morningstar Category. The stake propelled the fund to a 39% gain in 2021, beating all but a few category peers. Invesco Comstock ACSTX, a deep-value fund focused on large caps, also has favored energy stocks in the past few years and recently had 13% of assets in the sector, about twice the large-value category average. That exposure pushed the strategy into the category’s top decile. Energy sector funds were among the best performers in 2021. Fidelity Select Energy FSENX and Delaware Ivy Energy’s IEYYX respective 54% and 43% gains were among the highest of any active equity fund Morningstar covers.

Lagging Industries in Strong Sectors

Technology was another top-performing sector, with the Morningstar US Technology Index gaining nearly 34% for the year. However, industry-level performance was mixed. Semiconductor firms posted some of the largest individual stock gains in 2021. Nvidia NVDA and Synaptics SYNA, for instance, gained 125% and 200%, respectively. Conversely, high-flying software stocks fell later in the year as inflation concerns mounted and the prospect of higher interest rates made these growth stocks less appealing. Huge winners in 2020, like Docusign DOCU and Block SQ (formerly Square), shed 38% and 22% of their respective market capitalizations since Dec. 1, 2021. Indeed, the average fund in the technology Morningstar Category fell 1% over the same period, more than in any other sector.

Funds with outsize software stakes bore the brunt of the reversal. Brown Capital Management Small Company BCSIX currently has 58% of assets in technology stocks--more than twice that of the average small-growth category peer--and nearly all of it in software. Large double-digit losses in top holdings Alteryx AYX, Q2 Holdings QTWO, Appfolio APPF, and ALRM contributed to the strategy’s bottom-quintile results. Zero exposure to semiconductors compounded the pain. That said, the strategy’s historical affinity for technology and software stocks has contributed to its impressive long-term record. The managers' lack of semiconductor stocks also is consistent with their aversion to cyclical businesses.

Healthcare had a strong year. The Morningstar Healthcare Index gained 21%, but the biotech component of that index fell 4%. Some funds with significant exposure struggled. Primecap Odyssey Aggressive Growth POAGX had 18% assets in biotech, which was among the largest stakes of any diversified fund. Its managers typically invest heavily in industries whose firms they think have prospects for rapid earnings growth, but with most biotech picks in the red, the strategy’s 9% gain in 2021 landed in the mid-growth category’s bottom half.

Vaccine stocks were an exception. Pfizer PFE and Moderna MRNA gained 65% and 143%, respectively, and the Germany-based BioNtech BNTX climbed 216%. Stakes in the latter two helped T. Rowe Price Health Sciences PRHSX offset losses elsewhere in its broad basket of biotech holdings. Solid performance in other healthcare industries also helped the strategy post a 13% gain in 2021 and landed in the middle of the health Morningstar Category pack.

The Year for Value

Value equities finally beat growth stocks in 2021 after four years of lagging them. Value won across market caps, though its margin of victory was bigger among smaller-cap funds. The average US small-value fund gained 32%--20 percentage points more than the average small-growth fund. Meanwhile, the average US mid-value fund gained 29% and large-value gained 26%, or 16 and 6 percentage points more than their growth counterparts, respectively. Many deep-value strategies excelled, particularly Poplar Forest Partners PFPFX; its 39% gain was among the largest of any value fund that Morningstar covers. The strategy’s concentrated, contrarian, and benchmark-agnostic approach can be extremely volatile because it is willing to hold out-of-favor stocks for a long time. Prior to 2021, performance had languished in the large-value category’s bottom quintile since 2016--the last calendar year that value outperformed growth. True to form, however, the strategy delivered when deep-value stocks surged.

Not all value funds were winners, though. Janus Henderson Small Cap Value JSIVX landed in its category’s bottom decile, despite gaining 23%. Many of its regional bank holdings and retail picks like Carter’s CRI and KAR Auction Services KAR failed to keep pace with consumer discretionary and financial stock gains.

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About the Author

Eric Schultz

Manager Research Analyst
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Eric Schultz is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers equity strategies.

Before Joining Morningstar in 2019, Schultz was an associate at UBS in its wealth management division, conducting mutual fund research to help individuals, foundations, and corporations manage their investment goals.

Schultz holds a bachelor's degree in philosophy from Northwestern University. He also attended the Pembroke-King's Programme at the University of Cambridge and is a Level I candidate in the Chartered Financial Analyst® program.

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