Christine Benz: Hi, I'm Christine Benz from Morningstar.com. To some investors, mid-cap stocks represent the best of all words, in that they're still nimble and growing, but they're through their initial growing pains. Joining me to share some favorite actively managed mid-cap stock funds is Russ Kinnel. He's Morningstar's director of manager research. Russ, thank you so much for being here.
Russ Kinnel: I'm glad to be here.
Benz: Russ, let's just talk about the thesis for mid-cap stocks. I think some investors do think that they kind of represent the sweet spot in a lot of ways. But, I guess, as an investor, do I need to carve out a dedicated fund that focuses specifically on mid-cap stocks, or is there another way I could play it?
Kinnel: Well, certainly if you have total stock market or extended market index funds, or some other funds that dip into mid-caps, you might not need it. But I do think it's an important part of the overall market, and obviously it's a good point for companies, because typically you're talking about a company between $2 [billion] and $12 billion market cap, and that's often a really good growth spot. So "the sweet spot" may be a little overselling it, but it is a good place to invest.
Benz: So here again, this is an area where if you want a dedicated allocation to mid-cap stocks, you're perfectly fine doing an index fund, say a Vanguard mid-cap index or something like that, that is focused on mid-cap stocks. But we're going to talk about some favorite actively managed funds. And one that you like, along with the team, is called Parnassus Midcap. People might know its large-cap funds, but this mid-cap fund might be a little less familiar. This one has an ESG mandate. Let's talk about what that is and how this fund approaches that.
Kinnel: So, the ESG mandate means they are screening out companies that pollute, sell tobacco, defense companies, alcohol companies. A lot of screening out but also looking for companies that are good, sustainable companies to invest in as well.
Benz: There's a growing appetite for funds that do have an emphasis on ESG, but I know that you and the team think that there's a lot to like here from an investment standpoint as well. This is a fund that tends to behave, as far as I can tell, pretty well on the downside, so it's not going to be the best, maybe, in a roaring bull market, but it'll earn its keep when things are going down.
Kinnel: That's right, and it's kind of unusual, because it's a fairly focused portfolio. Usually you think of more volatility because there's more issue risk. But because of the quality focus in their strategy, you're right, it actually makes the fund relatively defensive, which is a really appealing way to go--that stock picks have a big impact, but at the same time you're not paying a big price in terms of volatility.
Benz: Vanguard Selected Value is another one that is on your list. It has multiple managers. It lands in Morningstar's mid-cap value category. It's a Vanguard fund, so its cheap price tag is an attraction. I guess a question is, since it has several managers, three managers, I believe, how do they keep it from kind of looking like a mid-cap value index?
Kinnel: Yeah, you know, they do have three subadvisors who are running mid-cap value dedicated strategies, so it is style-pure. In that way, it's like an index. It charges 36 basis points, so in that way it's like an index. But you do have three managers making stock picks, and it really shines through. Barrow Hanley has a majority of the asset, so it's not evenly divided. Pzena and Donald Smith handle the rest. So you have three variations of kind of deep-value strategy. It really is a fairly distinctive-behaving fund. You can see, in years like 2018, it had a rough go of it because of all that exposure to deep value, has a lot in industrials, not that much in tech and healthcare, so it's a relatively volatile fund. When you hear three subadvisors, you expect kind of big, bland indexlike performance. But if you look at the performance, it's actually been pretty distinctive.
Benz: And this is one that we have in Morningstar's 401(k) plan, actually. Another fund on your list, I think this one'll be probably familiar to most of our viewers, Fidelity Low-Priced Stock. I guess the question is, with a veteran manager in place, and there's so much to like about that, but also a very large asset base, why do you and the team continue to have a lot of enthusiasm for this fund?
Kinnel: Yeah, you're right, it's a really amazing fund. $31 billion in assets, 800 stocks. It really shouldn't work. It should be a really boring fund at that point. But Joel Tillinghast is one of the more amazing investors out there. He just really has an incredible acumen for understanding the details. He's got a value tilt to his strategy, likes relatively cheap companies, likes good yield, but it doesn't have to have a good yield, and just has built a tremendous portfolio. It's a wide-ranging one. Vanguard Selected Value is kind of focused on that mid-value space. Tillinghast's portfolio really is all over the market. You see a lot of large-cap, some small-cap, some blends, some value. It's really a wide-ranging portfolio. But at the end of the day, he's just done a great job by any way you look. Now, someday, if he retires, then I'm probably not going to be as enthusiastic about the fund, but he's still going great guns, he's still doing a great job at the fund. Every once in a while we'll try and trick him. You know, we'll ask him about the 700th company on the list, and he knows it flat. He's not just delegating all that authority. He really knows his companies.
Benz: Russ, always great to get your recommendations. Thank you so much for being here.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.