(PUB) Investing 2015

9

October 2015

Morningstar FundInvestor

Exhibit 2 shows the results in a different way, via the average excess returns that each scenario produced in the subsequent three-year periods. Again, context matters a lot here. As a group, large-growth funds have trailed the Russell 1000 Growth Index by an average of 1 . 61 percentage points net of expense over those rolling periods. Funds with returns that beat their peers during the past three years subsequently trailed the index by 1 . 49 percentage points three years later—that’s better than just picking at random. It’s also better than picking funds with strong past sector-rotation results, which trail the index by an average of 1 . 64 percentage points three years later. Choosing funds by stock-picking or by the combina- tion of low sector allocation/high stock selection yields better returns than any of the previous methods.

Exhibit 3 M500 Large-Growth Funds

Avg 3-Yr Annl Excess Return in Subsequent 3-Yr Period

Morningstar Analyst Rating

Morningstar Rating

Fund

ClearBridge Aggressive Growth IS

5.5

• QQQ

Touchstone Sands Cap Select Grw

4.0

´ QQQ

Vanguard PRIMECAP Core

2.7

ΠQQQQQ

PRIMECAP Odyssey Growth

2.2

ΠQQQQQ

Morgan Stanley Inst Growth IS

1.4

ΠQQQ

Sequoia

1.2

ΠQQQQQ

T. Rowe Price Blue Chip Growth

0.8

• QQQQQ

T. Rowe Price New America Growth ´ QQQQQ

0.6

Harbor Capital Appreciation Instl

0.6

ΠQQQQQ

Fidelity New Millennium

0.5

´ QQQ

TIAA-CREF Growth & Income Instl

-0.9

´ QQQQ

American Funds New Economy R6

-1.0

ΠQQQQ

Exhibit 2 Added Value of Large-Growth Funds

Fidelity Contrafund K

-1.1

• QQQQQ

0.0

LKCM Equity Instl

-1.2

• QQ

Amana Growth Institutional

-1.7

• QQQ

-0.4

T. Rowe Price Spectrum Growth

-2.8

´ QQ

-0.8

American Funds Grw Fnd of Am R6 ´ QQQ

-3.8

-1.36 %

-1.40 %

Average

0.4

QQQQ

-1.49 %

-1.2

-1.61 %

-1.64 %

Source: Morningstar Analysts.

-1.6

that manages Primecap Odyssey Growth POGRX and subadvises Vanguard Primecap Core VPCCX . Similar to most funds in the group, the team takes a sector-agnostic approach to investing, more or less allowing the market’s most attractive opportunities to guide their portfolios. TIAA-CREF Growth & Income TIGRX is one of the few funds on the list that sticks more closely to its benchmark, the S & P 500 . Though it doesn’t follow the Russell 1000 Growth Index, the fund’s attention to a benchmark produces relatively stable sector weightings. As a result, manager Susan Kempler’s main source of added value has come primarily from stock-picking. As a group, the M 500 large-growth funds that pass the two-part screen also outpace the Russell 1000 Growth Index, on average. That outcome serves as a reminder of the usefulness of adding the human analytical touch to mechanical fund screening. K Contact Janet Yang at janet.yang@morningstar.com

Return

Sector Allocation

Stock Selection

Sector & Stock

All

Data from 07/2005–06/2015. Average excess returns versus Russell 1000 Growth Index over three-year rolling periods.

Screening the M500 These relatively subtle outcomes for large-growth funds are at least partly due to the more efficient markets seen in the larger-cap space. Adding a qualitative analysis consideration via the forward- looking Morningstar Analyst Ratings improves the numbers considerably. Exhibit 3 presents the large-growth Morningstar Medalist funds within the M 500 that meet the top-half stock-selection/ bottom-half sector-allocation screen. Many of the names on the list are longtime analyst picks and well known to investors. There are four that have won Morningstar’s Fund Manager of the Year award, including 2014 ’s winner, the team at Primecap