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Large Growth Funds Come Back to Life After a Tough 2022

Read Time: 3 Minutes

Managers who invest in large-cap growth stocks took it on the chin in 2022, but those who stuck with their picks have bounced off the mat in early 2023. The Russell 1000 Growth Index’s 29.1 % decline was its worst yearly drop since the global financial crisis in 2008. For the year to date through Feb. 23, 2023, however, the index was up more than 8%.

Direct’s portfolio analysis tools can show which of last year’s hard-hit funds have been hitting back recently.

Assessing Risk

Morgan Stanley Institutional Growth’s (MSEQX) 60% decline in 2022 was the steepest of any large-growth Morningstar Category fund in our coverage. The Dennis Lynch-led strategy, which has a Morningstar Analyst Rating of Gold, is no stranger to volatility. It lost 50.5% in 2008 and then leapt 63% in 2009. Morningstar’s risk model can show what makes this such a feast-or-famine fund.

To run its portfolio through the risk model, follow these steps:

  • In Risk Model, go to Risk Model Analysis
  • Click on Select Investment and add Morgan Stanley Institutional Growth
  • Once added, click “OK”
  • The Risk Model Dashboard will appear
  • For this example, let’s use the Historical Risk Exposure tool located on the bottom left of the screen.

The tool’s North America Equity Model shows the fund has consistently had more growth exposure than the Russell 1000 Growth over the trailing three-year period. The red line shows the style premia, or how much the market favored that factor in each month. The chart shows how quickly investors turned sour on growth at the beginning of 2022 before mounting a brief comeback near year-end.

Morningstar Direct’s graph showing historical risk for Morgan Stanley Institutional Growth’s MSEQX

Analyzing Portfolios

The fund’s growth tilt didn’t help in 2022, but stock-picking didn’t either. To see how well the managers picked stocks over the period, use the Portfolio Analysis module.

  • Under Portfolio Analysis, go to Single Portfolio under Equity Attribution

  • Click “New” at the top left of the screen
  • Add Morgan Stanley Institutional Growth to the portfolio
  • Change the benchmark to “ETF Index Proxy” and click “OK”
  • Set the start date as Jan. 1, 2022
  • Set the end date as Dec. 31, 2022 and click “Ok”.

Morningstar Direct’s Portfolio Analysis module for Morgan Stanley Institutional Growth’s MSEQX

What Funds Are Hitting Back?

The attribution report below shows how successful the managers were at picking the right sectors and stocks. Not very, judging by the negative numbers in both the sector allocation and selection columns’ total row. Stock-picking, particularly among technology stocks, hurt the most. Indeed, the fund’s stakes in Aurora Innovation (AUR) and Coinbase Global (COIN) each lost more than 85% in 2022.

For the year through Feb. 22, 2023, however, many of the fund’s faltering 2022 holdings are flying again. Carvana (CVNA), for example, rallied more than 100% after losing more than 90% in 2022. The strategy’s 15.3% gain so far this year has beaten 97% of its category rivals.

Morningstar Direct Morgan Stanley Attribution Report

Neutral-rated Baron Partners Retail (BPTRX), which fell nearly 43% in 2022 after vaulting 149% in 2020 and 31% in 2021, is also a volatile fund with a lot of growth factor exposure.

Morningstar Direct’s graph showing historical risk for Baron Partners Retail’s BPTRX

The portfolio’s large helping of consumer cyclical companies hurt the fund more than stock-picking itself, according to Morningstar attribution. It’s biggest and most painful consumer cyclical holding, however, was its huge position in electric car maker Tesla (TSLA), which reached 50% of assets at the end of 2021. As Tesla goes, so goes this fund. The stock’s 65% 2022 plunge dragged the strategy down with it. Tesla’s 60% gain through Feb. 22 propelled the strategy’s 25% gain that beat 99% of its peers over the same period.

Morningstar Direct’s Baron Partners Retail Attribution Report

Silver-rated PGIM Jennison Focused Growth (SPFZX) had less growth factor exposure than Morgan Stanley Institutional Growth and Baron Partners Retail, but its 41% decline in 2022 was still worse than more than 90% of its large-growth peers.

Morningstar Direct’s graph showing historical risk for PGIM Jennison Focused Growth SPFZX

Like Morgan Stanley Institutional Growth, stock-picking weighed more on performance than sector allocation decisions. The fund didn’t have as big a bet on Tesla as Baron Partners Retail, owning the carmaker still hurt last year. Other speculative holdings like Snowflake (SNOW) also declined 58% and the fund’s longtime stake in (AMZN) fell nearly 50%.

But since the start of 2023, the strategy’s nearly 10% gain through Feb. 22 beat 84% of its category peers as Tesla revved up, and Airbnb (ABNB) and NVIDIA (NVDA) gained more than 40%.

Morningstar Direct’s PGIM Jennison Focused Attribution Report

Looking Ahead

These funds’ recent volatility, though painful, is well within expectations for aggressive growth strategies. It’s not clear if their early 2023 rebound will endure, but their risk profiles are likely to remain high if they continue to lean heavily on the growth factor.

When you’re able to understand the potential impact that different risk factors can have on every portfolio, it’s easier to build personalized strategies. Morningstar Direct’s powerful platform offers you the quality data and research to help improve outcomes for your clients. Get a free 14-day trial today.