Investing Insights: Vanguard, Pepsi, and a Midyear Outlook

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Vanguard has continued to see massive inflows into its funds, but most of the growth has been concentrated in the firm's passively managed lineup. Joining me to provide a midyear recap of Vanguard is Alec Lucas. He is a senior analyst in Morningstar's manager research group.

Alec, thank you so much for being here.

Alec Lucas: Thanks for having me.

Benz: Alec, it is hard to not see these massive inflows going into Vanguard's lineup, but most of the flows have been concentrated in the index funds and the ETFs. Investors have in fact been selling the actively managed products.

Lucas: They have had good flows into their actively managed bond funds, but equity funds, U.S. equity funds in particular, have been in outflows pretty consistently since 2008.

Part of the background of the dominance in flows story for Vanguard is their leadership in passive investing. They have seen tremendous amount of inflows, that's continuing, $82 billion thus far through May of this year. Second-ranked is iShares. So, that gives you a sense of the fact that passive is really driving their dominance in flows in recent years, sort of post-financial crisis. Prior to the financial crisis, they were roughly even in actively and passively managed assets and there's been a pretty significant divergence since the financial crisis.

Benz: The fact that Vanguard has been continuing to see inflows into its taxable bond lineup, that mirrors what we are seeing elsewhere in the fund universe, where it seems that within the bond space at least, investors haven't completely lost faith in active management.

Lucas: There's probably a number of reasons for that. Retirees, the baby boomers retiring and becoming a little bit more conservative. Obviously, we've had a very good run in the equity market. And so, perhaps investors wanting to lock in some of those gains.

Benz: With some of these asset inflows have come some headaches including some gripes from customers about customer service, where they have called Vanguard and maybe have had long hold times or other problems. Let's talk about that and I guess, as a sort of caveat before we get started, it's really difficult for us to know what customers at-large experience in terms of the interactions they have with any firm, not just Vanguard.

Lucas: There are important points to make when we talk about customer service and challenges Vanguard has had. Other firms haven't had the inflows they've had. I think that pretty much any firm would struggle with the degree of inflows that they've had. That said, by their own admission, 2016 was a rough year for them. They had a huge amount of inflows, a huge amount of paper inflows, and they also had some challenges in being appropriately staffed.

They've really taken significant steps to address that. They have started a client experience group. They've started a lab testing approach. They have tried to simplify forms like transfer of asset forms, reduced the complexity, reduced the jargon, reduced the length of those forms.

The goal is to launch 12 client-testing labs by the end of 2018 and help a client who, say, is a millennial starting out and just begins investing with Vanguard to somebody who is in retirement and is beginning to spend the money they have spent all their life saving. They want from beginning to end, a client's experience to be pretty smooth.

They have got this lab testing approach to help refine that. I think that should help improve some of the problems they have had. They continue to have problems with account balances and technical glitches, but they are certainly aware of it and investing in it. I think it's important to recognize that that comes in a context of significant flows.

Benz: Major leadership change going on at the outset of 2018 as well with Tim Buckley taking the helm. Let's talk about that.

Lucas: He is a Vanguard veteran. He took over in January of 2018. He is their fourth CEO. He started at Vanguard in 1991, and his first three years on the job, he was the assistant to founder Jack Bogle. He is somebody who is very close to the company's origins. He did his MBA at Harvard and then came back to the company in 1996 and has been in leadership since 2001. Most recently, he was chief investment officer. He is very well-positioned to lead the company in terms of his experience and broad knowledge about the business.

Benz: I also want to cover a couple of new fund launches. One is just announced today with some ESG or environment, social, and governance products, index-based ETFs coming to market. Let's start with those, but I also want to talk about Total World Bond Market that launched earlier this year.

Lucas: In May, there was the Total World Bond Market ETF that they launched. More recently, just today, so fresh news, U.S. ESG ETF and an International ESG ETF. This follows upon the February 2018 launch of six actively managed multifactor--well, one is a multifactor fund and then the other are single-factor funds. We see Vanguard trying to be relevant in areas where it thinks it can serve investors well and do it at a low cost.

Benz: Certainly, there are some data to indicate that the millennial population in particular likes ESG strategies in general.

Lucas: For sure.

Benz: Let's talk about performance at the firm's funds, starting with some funds that so far in 2018 have performed particularly well.

Lucas: Big-time leadership from Vanguard International Growth. This is a fund that got nominated for Manager of the Year in 2017.

Benz: One that I own as well.

Lucas: It's doing really well this year again. It's got a couple of subadvisors, Baillie Gifford and Schroder. Those two subadvisors have done very well of late. Some other standouts for Vanguard are index funds. It shows why they are getting flows into that area. For example, the Vanguard Extended Market Index Fund invests in U.S. stocks outside the S&P 500 …

Benz: So, small and mid-cap stocks.

Lucas: Yes. Small and mid-cap stocks. Those are funds that are really leading the way for Vanguard this year.

Benz: In terms of disappointments so far in 2018, understanding that we are just talking about a six-month period, so, not judging based on such a short period.

Lucas: Among medalists, Silver-rated Vanguard Selected Value is not doing as well this year, it's a mid-cap value fund and it's not been a strong environment for value. That's lagging. Vanguard Primecap Core, it's in the large growth category even though it's got a core mandate, it leans toward growth. But both, the Selected Value and the Vanguard Primecap, have great records over the past decade, so I wouldn't jump the ship.

Benz: I do own Primecap Core as well. Let's talk about what's next for Vanguard. You talked about trying to resolve some of the customer service experience issues. In terms of other things that you think are key priorities or things that are on the horizon for the firm--what sorts of things would you point to?

Lucas: They have been trying to expand overseas for quite some time, but regulatory changes, fee pressures, changes to distribution, I think they are well-positioned to make some real headway there. They have got about $400 billion in assets among non-U.S. investors. Really, what they have been doing is trying to gain distribution footholds in countries by leading with ETFs and index funds.

Vanguard is though not just committed to indexing but to low-cost investing. Active management is a part of that. They are launching some actively managed funds in Canada, for example, they are in the midst of doing that. One of them is a clone of Vanguard Windsor. I think the real challenge for Vanguard as they expand their business overseas is to not ignore the active management part of their business and to really strive to find home-grown asset managers in the countries they are trying to get a foothold in, the Primecaps of Canada, if you will, as well as strong subadvisors. They have got really good relationship with Wellington Management as well as Primecap. Those are two standouts for them. Baillie Gifford is another.

The real challenge, and of course, Baillie Gifford is not in the U.S, but the real challenge as they expand in a place like Canada and elsewhere is to find strong active manages and that's a place that they have room to grow.

Benz: Alec, thank you so much for being here to provide a recap of what's going on at Vanguard. I know there are a lot of eyes on the firm. I appreciate you providing an overview.

Lucas: Thanks for having me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Sonia Vora: We think shares of Pepsi offer a compelling opportunity for long-term investors, given a more than 10% discount to our valuation combined with a 3%-plus dividend yield.

In our view, the firm's formidable portfolio of leading beverage and snack brands has helped it entrench itself in retailers' supply chains and secure valuable shelf space for its offerings. These retail relationships, combined with economies of scale in manufacturing and distribution, underpin our view of Pepsi's wide economic moat.

While soft performance in the North American beverage businesses has weighed on shares in recent quarters, we expect these challenges to subside over the longer term as the firm more effectively allocates resources to its core beverage brands, which include trademark Pepsi and Gatorade. Further, we note that Pepsi has been able to drive low-single digit increases in price and mix over the same time frame, indicating that its brand equity remains solid.

Performance in the higher margin snack business also remains healthy. Frito-Lay North America, which generated around a quarter of sales and more than 40% of operating profit in 2017, has averaged around 3% sales growth over the past five years, outpacing the flat-to-negative results seen across the domestic packaged food space as of late. We expect performance in this business to remain strong as consumers' desire for more convenient foods continues to fuel snacking growth.

Our longer term forecast for Pepsi incorporates 3% sales growth, with around two thirds of these gains driven by price and mix, and average operating margin in the high teens.

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Susan Dziubinski: I'm Susan Dziubinski for Morningstar.com. Bond funds can serve many purposes in the portfolios of retirees. For one, they throw off much needed income. They also can provide some ballast against stock market swings. Morningstar director of personal finance Christine Benz includes a handful of bond funds in her model portfolios for retirees. Here are some of them.

Emory Zink: Portfolio managers Rob Galusza and Julian Potenza benefit from the breadth and depth of resources as they allocate to a mix of Treasuries, agencies, and high-quality corporate credit in Fidelity Short-Term Bond. The firm's robust teams of securitized and corporate credit analysts as well as quantitative risk tools complement the portfolio managers' shrewd analysis of their opportunity set, which often includes careful attention paid to overnight rates, repo rates, and money market funds. The fund tends to tilt higher credit quality than its typical peer, and it also tends to have shorter duration given that it tracks its Bloomberg Barclays 1-3 Year Government Credit Index rather closely. What this means is that in periods of risk-on fervor, the fund will probably lag peers that take greater latitude in terms of duration, credit quality, and out of benchmark fare. But when markets turn rocky, this particular fund should outperform that same group, and this should contribute to stronger risk-adjusted returns over time.

Sarah Bush: Gold-rated Loomis Sayles Bond has a number of strengths. These start with its investment team which is anchored by bond fund legend Dan Fuss. Dan Fuss works here with managers Elaine Stokes, Matt Eagan, and Brian Kennedy. Loomis has one of the largest credit research teams in the business. This is really important given the fund's willingness to take on significant credit and currency risk. They will also venture into troubled parts of the bond market when the managers think investors are getting well-compensated for that risk. Recently though, the team has been pretty cautious, which also illustrates the strength of the fund. It has a value-oriented philosophy to bond investing. This approach has generated top-notch returns over the long haul, but you have seen significant losses when credit and non-U.S. dollar currencies run into trouble. Those who have been willing to weather its ups and downs have been well-rewarded, but it's really best for holding with the relatively long time horizon.

Phillip Yoo: Vanguard Short-Term TIPS Index Fund is a strong option for investors looking for protection from unexpected inflation risk. Because of the fund's short duration, not only does it have low interest-rate risk but also it provides high correlation with the changes in the Consumer Price Index. Because TIPS are offered by the U.S. government, this fund has nearly zero credit risk. The fund tracks the Bloomberg Barclays TIPS 0-5 Year Index, and this fund benefits from Vanguard's indexing expertise. Over the last three years, the fund returned about 1% per year, and this is mainly due to the investors' low expectation for future inflation. This return pattern demonstrates that given the fund's very low fee of 6 basis points, this vehicle is suitable for buy and hold long-term strategy.

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Susan Dziubinski: For Morningstar, I'm Susan Dziubinski. We are midway through 2018. Here to discuss what's been going on with retirement planning is Christine Benz. She is our director of personal finance on Morningstar.com.

Christine, thanks for joining me.

Christine Benz: Susan, it's great to be here.

Dziubinski: One of the positive developments we've been seeing this year are in large balances in 401(k) plans and investment plans and improving investor confidence, is that right?

Benz: It is right. When we look at the data that Vanguard and Fidelity provide, both show in large participant balances in the 401(k) plans that they oversee. The average 401(k) balance for both firms was just over $100,000 for the average 401(k) participant. The number I really like to see was for people who have been participating in Fidelity-managed 401(k) plans for at least 15 years. The average balance was $380,000 as of their most recent data run. That's up significantly from the year prior. It's an encouraging number. As you say, those enlarged balances often translate into improved retiree and pre-retiree confidence.

The Employee Benefit Research Institute puts out an annual survey of retiree and pre-retiree confidence. Two out of three pre-retirees said that they felt at least somewhat confident in their own ability to retire. Retirees were feeling really comfortable on the viability of their plans. A third of people already retired said that they were feeling very confident that their plans would last, that their money would last throughout the retirement years, and 44% of those retirees surveyed said that they were at least somewhat confidence. A lot of things lining up to make people feel more comfortable about making retirement work, which is great news.

Dziubinski: That is great. But you have been talking about some risks for pre-retirees right now. Can you talk a little bit about that?

Benz: There are. I've written about how I'm concerned about this new cohort of people just getting ready to retire. Because in a lot of ways there's a lot to make people feel like they are ready to retire. One thing we know is that when balances are up, valuations are often on the high side. Another thing that retirees have to keep an eye on is the fact that starting bond yields are still quite low today. Even though we've seen yields kick up a little bit recently, the combination of factors that would help new retirees really grow their balances in the decade ahead are not really working in their favor. I do think that they need to be careful and they need to be ready to make some changes if their retirement date happens to coincide with a lousy market environment.

Dziubinski: What could an investor do to mitigate some of these risks?

Benz: A couple of key things. One is making sure that they have adequate liquidity, adequate cash cushion set aside in their portfolios to tide them through weak performance from the stock market or the bond market or both. That's a good starting point. Revisiting asset allocation, taking a look at your portfolio, using our X-Ray tool on Morningstar.com. Seeing where you are in terms of your positioning relative to your targets is a great strategy, especially because as investors we naturally get a little bit complacent when equities have been so good for so long as they have been recently.

Another key thing to keep in mind is, if you are someone who is just starting to retire, and you are drawing from your portfolio, plan to be a little bit flexible in terms of how much you will draw from your portfolio. The best way to tide your portfolio through a period of weak market returns is to make sure that you are not pulling too much from that portfolio. Ideally, you'd go into retirement with a little bit of wiggle room with that spending rate and the ability to tighten your belt if you encounter a weak market environment.

Dziubinski: You've alluded to this earlier. We have seen rising yields this year. What should retirees really make of that? Should they be worried that it's going to somehow derail their plans?

Benz: There's a lot of concern out there. I guess, it depends on what you're invested in. If you are a cash investor, higher yields are an unmitigated positive for your portfolio. You can now find one-year CDs that are yielding over 2%. You can find online savings accounts that offer a lot of liquidity and FDIC protection for 2% as well. It's great news for cash investors.

Bond investors have had to endure a little bit of price volatility in their portfolios even as they have seen higher yields come online. I do think it's worth taking a step back, thinking about why you are holding bonds in your portfolio. Over time, higher yields, as they do become available, should be good for you as a bond investor even though they cause a little bit of volatility in the short term. I do think that bonds' position as ballast for equity portfolios still stands. Even in a terrible period for bonds, it will be nowhere near as bad as the havoc that a weak equity market can wreak on a portfolio. I think that perspective is really valuable.

Certainly, you want to make sure that you are not taking too much risk in your bond portfolio. I wouldn't be venturing into long duration bonds at this point. I'd also be careful about taking too much credit risk in a bond portfolio, particularly given that this market recovery, the economic recovery that we've experienced has been going on for so long. I think you wouldn't want to be positioned with an overly credit-sensitive portfolio at this point in time.

Dziubinski: Investors--pre-retirees and retirees--shouldn't necessarily be fearful of bond funds right now?

Benz: Not necessarily. But I think they need to pick their spot. Don't venture into some of the riskier bond types that we just talked about.

Dziubinski: Got you. Now, another set of sobering data, as if what's going on in the market isn't enough, are the numbers you see around healthcare costs in retirement. Let's talk a little bit about that.

Benz: Fidelity annually has been putting out this benchmark of what a 65-year-old couple should expect to spend out of pocket in healthcare costs over their retirement lifespan. The most recent run at the data had the figure at $280,000 over that retirement life cycle. The really scary thing is that that doesn't encompass long-term care costs. It's a big number. Vanguard recently decided to conduct some research along these same lines, but they are coming at it in a slightly different way. They are trying to help retirees estimate how much they would expect to spend per year in retirement. Vanguard's data set was pointing to an annual outlay of $5,200 per year for a 65-year-old woman, and they are assuming that the woman has purchased a supplemental insurance policy to go along with Medicare as well as Medicare Part D, the prescription drug coverage. These are two benchmarks. Certainly, big numbers and something that retirees can use to help aid in their planning in terms of how much they will spend from their portfolios in terms of healthcare costs.

Dziubinski: Regardless of whether it's Fidelity's approach or Vanguard's approach, those are big numbers. What types of things can investors be doing to prepare for those costs?

Benz: Definitely factor them into their budgets. I think as people get close to retirement, it's really crucial to look at how healthcare costs might change relative to when they are working. A lot of people say, aha, I'm covered by Medicare, now I'm home free. Well, not necessarily. There are other costs that will crop up necessarily in retirement. It's important to make sure that you are factoring them into your spending plan. Also, bear in mind the fact that we have recently seen healthcare inflation tick up a little bit. We had been through a period where healthcare inflation was actually looking pretty mild. We are seeing it flare up again. That accentuates the case for making sure that you are minding inflation pressures when thinking about portfolio, making sure that you are adding those inflation hedges to your portfolio.

Dziubinski: Lastly, we've seen a return of volatility to the market this year. Specifically, what are some things that retirees can do to cope with that market volatility?

Benz: I mentioned earlier on, Susan, the idea of having those liquid reserves. As you know, I'm a big fan of this Bucket strategy and the central underpinning of the Bucket strategy is having ample liquid reserves--not too much--but one to two years' worth of portfolio expenditures in true cash investments I think is a good starting point. Revisiting asset allocation is another good starting point. Doing some strategizing around tax planning, I think, is another way to kind of take back control in an uncertain market. We now have some clarity on tax rates at least until 2025. I think it's a great time for retirees to strategize with their tax advisors about where best to pull their assets from, pull their portfolio withdrawals from in an effort to keep taxes down. Definitely try to keep your focus on things you can control versus getting caught up in the day-to-day market noise. Because it obviously can be very disconcerting when you are in drawdown mode in particular.

Dziubinski: Christine, thank you so much. This was a terrific overview.

Benz: Thank you, Susan.

Dziubinski: For Morningstar, I'm Susan Dziubinski. Thanks for watching.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Actively managed large-cap growth funds have been seeing outflows, but does that make them a buy? Joining me to discuss that topic is Russ Kinnel. He is director of manager research for Morningstar.

Russ, you wrote an article in the latest issue of Morningstar FundInvestor where you looked specifically at Fidelity Magellan and noted that it has been seeing asset outflows recently and you unpacked the significance or lack thereof of that. But let's talk about large-cap growth funds more broadly. As a group they have been seeing significant asset outflows; these are the actively managed funds. You've written in the past about how outflows from a given category can sometimes be a little bit of a buy signal, a contrarian indicator. What's your take on this particular category of large-cap growth funds?

Russ Kinnel: That's right. The contrarian flow view has been signaling buy on large growth for really 10 years, and it was correct. It was a great time to buy; large growth has performed very well. Do I think that means it's going to keep being the outperformer? Probably not. I think there are some reasons to have a little skepticism about flows and certainly to take a single-minded view that that's all you need to know.

Benz: One thing we've been seeing in the past five years or even stretching back further than that is that investors have been dumping actively managed funds and buying sort of total market index funds instead. Do you think that explains some of the outflows we've seen from large-cap growth funds in particular?

Kinnel: It does, and it suggests that people are not making as dramatic a change in their portfolios or giving up on growth the way those outflow numbers suggest. Because, if, say, you are taking money out of a really diversified large-growth fund like Growth Fund of America and you are putting it in a total stock market index fund, you are modestly shifting some money out of growth and into the value side. Obviously, a total stock market fund is cap-weighted, so it's got all those big tech names that dominate the growth side anyway. It's just really a fairly subtle shift out of growth and in with some holdings in blend and value.

Benz: Those FAANG stocks that have been leading the way for large-cap growth funds are quite well-represented in the total market index funds.

Kinnel: Right. And if you think about some of these really big large-growth funds, they have probably got 100 to 300 names to begin with. You are going from, let's say, a 200-name growth portfolio to a 1,000 or 3,000-name total market fund. You are still being slightly more diversified. But again, it's not a dramatic shift.

Benz: You also note that not every large-growth fund has been seeing outflows, that the better-performing large-cap growth funds, those with 4 or 5 stars, have actually been seeing decent inflows?

Kinnel: There was an article suggesting that the fact that Magellan has beaten the S&P 500 and is still in outflows, does that mean active management is doomed. But Magellan has been a 1 to 3-star fund over the manager's tenure. So, it's easy to see why it wouldn't be a big draw. If you look at 4 and 5-star large-growth funds, they are actually getting inflows. So, for the star rating being a quantitative measure of past performance, so, again, in other way of saying, funds have performed really in large-growth continue to draw money.

Benz: You have also pointed out that even though the category, large-cap growth category, has been seeing outflows, there are some giant funds that remain in this category. Let's talk about some of those.

Kinnel: That's right. If you look at funds like Growth Fund of America, Contrafund, some of the other really big funds, on the one hand they are getting outflows--though for Contrafund, it's really just a trickle--but on the other hand, the market is appreciating tremendously. Some are actually growing their total assets under management or maybe shrinking a little. To me, that's a good thing. I mean, when you look at an actively managed fund, that's over $70 billion or $100 billion, I would like for them to be in steady outflows, not dramatic outflows because that's a problem. But a trickle of outflows is probably the best situation possible.

Benz: Can you provide any broad guidance for investors in terms of how they should approach this growth to value split within their portfolios given that we have seen value investing, value stocks underperform growth for so long? How should investors be approaching that today?

Kinnel: I think generally you want to have roughly the same amount, but I don't think you need to worry about it too much. If say, you've got 2% more in growth and value, who cares? But if it becomes dramatic, you probably want to shift because, as you know, every once in a while the market shifts dramatically. We've had a couple of times where leadership shifted dramatically from growth to value, and you don't want to miss out; or conversely it could be a time when large growth is going to lose a lot of money. I generally wouldn't want too far with that over- or underweighting unless you really have some strong reason behind that overweighting.

Benz: Russ, thank you so much for being here to share your insights.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. What steps is T. Rowe Price taking to maintain market share in an era in which investors are gravitating toward passive products? Joining me to discuss that topic and to provide a midyear recap of T. Rowe Price is Katie Reichart. She is director of U.S. equity strategies in Morningstar's manager research group.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: You and the team were just out at T. Rowe Price in Baltimore sitting down with executive leadership and fund managers. I assume this question of the fact that we have seen this torrent of assets going to passive products is top-of-mind for T. Rowe Price. How are they viewing the firm's future in light of the fact that flows have gone so strongly to passive products?

Reichart: I would say one thing off the bat is that T. Rowe is doing really well considering they are primarily an active manager. Performance has been really strong across the board. We have seen them be a little bit more aggressive though on the business side. They are expanding sales efforts overseas to ramp up assets there. I think that that type of things makes a lot of sense.

Benz: I know the multi-asset products have been a big thrust for the firm. They have quite a few assets there. How is the firm thinking about that piece of its product lineup?

Reichart: Multi-asset is a big initiative for them, and they brought in Sebastien Page from PIMCO to head up that team. They have done a ton of hiring there. I think they really want to supplement their successful target-date business with other products. We've seen them even move into some areas that are kind of new to them, like liquid alternatives with the Multi-Strategy Total Return Fund. Down the road there might be something like the Capital Appreciation & Income Fund, an offshoot of David Giroux's very successful fund. I think that that's going to be a driver for them going forward.

Benz: Now, I know you and the team are constantly evaluating, re-evaluating the analyst ratings that we have on the products. Let's talk about some recent upgrades for T. Rowe Price funds. What are some of the highlights there?

Reichart: We have actually seen about five upgrades year to date through 2018. One prominent one is T. Rowe Price Equity Income. That went from Bronze to Silver. Really, since John Linehan took over in 2015, he has executed the fund well. He has past history at T. Rowe Price Value. We just felt like we were pretty comfortable with his approach there.

Benz: Then Small-Cap Stock was upgraded. QM U.S. Small-Cap Growth also upgraded, and New America Growth and Overseas Stock also upgraded.

Reichart: Small-Cap Stock went from Neutral to Bronze. I think T. Rowe has done a nice job in their small-cap arena and have added some more coverage to those types of small and mid-cap stocks. The QM fund is actually a quantitative fund, and that went from Silver to Gold. It's an area that's not a huge part of their assets overall, but they have done very well there. I think they have expanded with a couple of new quantitative funds along the same lines. Then New America Growth, T. Rowe has done just really well with their growth picks.

Benz: There have been some manager changes there though, too, right?

Reichart: There have. There have been a couple of changes at that fund. Justin White is fairly new, but he was a successful analyst. I think combined with the underlying strong analyst bench, there is a reason I think that fund will do well long term.

Benz: You always provide a review of how the firm's funds are doing in a given time period. Year to date, when you go asset-by-asset class and look at the various T. Rowe Price funds, how are they doing, what do their batting average look like?

Reichart: If you look at diversified U.S. equity, about two thirds are leading their category peer group norms. International equity, it's about the same. Fixed income, about 46%; and then allocation, 91%. Pretty impressive there.

Benz: How about the allocation funds? What's the main driver of why such a large number would be exceeding their peer group averages?

Reichart: With the target-date series, the main target-date series, those tend to be a little more equity heavy. They are benefiting from a market tailwind there. But just generally, good performance and allocation decisions, too.

Benz: In terms of leaders and laggards, let's talk about some of those. You mentioned that the firm's growth side of the shop is performing really well. I assume that we will be talking about some of those names here in terms of the leaders.

Reichart: If you look at their Blue Chip Growth, New America Growth, Growth Stock--all those are posting gains that are well above the Russell 1000 Growth Index for the first half of the year. Bets like Amazon and Netflix are really paying off, and this is continuing on to build on strong 2017 performance.

Benz: How about laggards?

Reichart: Not too many. T. Rowe Price High Yield has been in the bottom quintile of the category. But that fund can have some pullbacks from time to time but has a very strong long-term record, and it remains Gold-rated.

Benz: Katie, thank you so much for being here to provide this recap.

Reichart: Great to be here. Thanks.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.