The Second Quarter in U.S. Stock Funds: Settling Down
David Kathman, CFA, Ph.D., is a senior manager research analyst for Morningstar.
The U.S. equity market settled down in the second quarter of 2019 after several months of wild swings. In 2018s second half, the S&P 500 benchmark flirted with bear-market territory. Dragged down by big losses in energy and other economically sensitive stocks, it fell 19.4% between Sept. 21 and Dec. 24. Then in the first quarter of 2019, the market snapped back sharply, as the S&P 500 gained 14% and many of the same stocks posted the biggest gains. For the most part things have been much calmer over the past three months, with the S&P 500 gaining 3.7% from April 1 through June 27, and the other market indexes having similarly modest returns.
In keeping with this relatively calm environment, mutual fund returns across Morningstar Categories were tightly bunched, with no dramatic gains or losses. Among equity categories, only precious-metal funds and Latin America stock funds gained more than 5% for the quarter through June 27, and only energy funds lost more than 5%. The best-performing of the nine Morningstar Style Box categories was mid-cap growth, with a 4.6% gain, and the worst performer was small-value, with a 0.7% loss.
When we look at the returns of individual funds, theres a bit more variation, though nothing like what we saw in the previous two quarters. Here are some second-quarter winners and losers among funds in the nine Morningstar Style Box categories. For the most part, stable, moderate growth stocks were the best performers, though individual stock selection also had a lot to do with which funds succeeded and which stumbled.
, with a Morningstar Analyst Rating of Gold, was one of the large-blend categorys top performers in the second quarter, with a 5.8% gain through June 27 to rank in the categorys top 3%. As its name implies, this fund holds financially strong dividend-paying stocks, and its top holdings include stalwarts,,, and. Such stocks are typically known more for their steadiness than for market-beating gains, but they have been among the best-performing names over the past three months. Several other large-blend funds with a similar emphasis on steady dividend payers, such as Silver-ratedand, also performed very well in the quarter.
Bronze-ratedis one of several mid-cap growth funds that have excelled in the second quarter. Manager Andrew Peck looks for strong secular growers in the mid-cap space, especially in the heathcare, technology, and financial sectors. Several such holdings posted strong double-digit gains in the second quarter, notably medical diagnostic firmsand, and tech firmsand, all of which are among the top 10 holdings.
As a group, small-cap stocks have underperformed large- and mid-caps over the past few months, but there has been enough variation within the group that some funds have been able to excel by owning the right stocks. An example is Silver-rated, whose managers look for small-cap stocks with durable competitive advantages and sustainable cash flows. While some of the funds top holdings have suffered losses over the past three months, such asand, many others have put up double-digit gains, such as,, and. That was enough for the fund to rank in the small-blend categorys top 5% with a 4.2% gain for the quarter through June 27.
The flip side of the above is that even the best funds can go through a rough period if several of their holdings suffer problems at once. A good example is Gold-rated, which has one of the best long-term records in the large-blend Morningstar Category but ranked in the 99th percentile in the second quarter. Of the top 10 holdings in the March 31, 2019, portfolio, eight lost money in the second quarter (through June 27), including four with double-digit losses. These are all small- and mid-cap healthcare and technology stocks, which tend to be volatile but have mostly put up strong long-term gains. Such stocks are the bread and butter of the Primecap team, whose six funds all have Gold ratings but struggled in the second quarter.
Neutral-ratedand Bronze-ratedalso had second-quarter returns that ranked near the bottom of their Morningstar Categories (large-value and mid-cap blend, respectively). Both funds hold fewer than 20 stocks, so they suffer when there are multiple blowups at once, as was the case this past quarter. Of Longleaf Partners 17 stock holdings, nine had negative returns in the second quarter (through June 27), including four with double-digit losses; for Longleaf Partners Small-Cap, eight of 15 stock holdings lost money, including five with double-digit losses.
Finally, Silver-rated, managed for the past 20 years by Steve Wymer, is another fund with a strong long-term record that simply hit a speed bump in the second quarter. Wymers fairly aggressive growth strategy has worked very well over time, but has made the fund prone to bouts of short-term underperformance. The April 30, 2019, portfolio includes tech titans,,, and, but also several more-volatile names that suffered big losses in the second quarter, including semiconductor firmand biotech firmsand. As with the other funds weve seen, this rough patch is no reason to think any less of the fund, which remains an excellent choice for long-term investors.
David Kathman, CFA, Ph.D. does not own shares in any of the securities mentioned above. Find out about Morningstarseditorial policies.
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