What’s under an equity-based fund’s hood is vital information to advisors and investors. That’s particularly true of active funds where managers can cut, eliminate, or increase positions without notice.
Fortunately, the riddle as to what’s driving this year’s top-performing funds, both active and passive, isn’t much of a riddle at all.
“The winning funds so far this year, by contrast, underweighted technology stocks while making bigger bets on financial services, industrials, basic materials, and energy stocks,” says Morningstar analyst Amy Arnott. “All of these areas have bounced back as interest rates have edged up, commodity prices have recovered, and consensus has been building for a robust economic recovery.”
Of the 25 best-performing funds on Morningstar’s year-to-date list, five are exchange traded funds.
Sectors, Styles Matter
Among the top performers, 14 are dedicated smaller stock funds, including several focusing on micro caps, the group of equities below small caps. As has been widely noted, value stocks are back in style and that trend is also evident among this year’s top funds.
“There ’s also a dramatic difference between investment styles and portfolio statistics when comparing the two lists,” adds Arnott. “Growth stock holdings dominated the portfolios for the 2020 winners, accounting for about 78% of the combined portfolio. The top-performing actively managed funds in 2020 also favored large-cap stocks, with an average market cap of $25.1 billion. Because of the high growth expectations built into their prices, the favorite stocks also sport price/earnings, price/book, price/sales, and price/cash flow ratios well above those of the market benchmark.”
Another obvious trend this year is that 2021’s best-performing funds have little holdings- or sector-level overlap with last year’s leaders. As a prime example, financials are prominent among this year’s leaders, but the sector was repudiated last year amid low interest rates, suspended dividend growth, and forced loan-loss reserve expansion. Likewise, energy was down in the dumps last year due to the coronavirus, but it’s a star group in 2021 as the economy and oil demand rebound.
“The 2021 list of top holdings shows how dramatically market fortunes have changed. None of the names overlap with those in the 2020 list, and there’s also little overlap with the market benchmark. Instead of large, well-known technology stocks, the list mostly consists of more obscure stocks,” concludes Arnott.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.