(PUB) Investing 2015

November 2015 Vol. 24 No. 3

FundInvestor Research and recommendatio s for the s riou fund investo

SM

The Large-Growth Conundrum

The Top 10 Stocks of the Russell 1000 Growth Index Name Ticker

Weighting (%)

Apple Inc

AAPL

6.27

Microsoft Corp

MSFT

1.93

RusselKinnel, Director of ManagerResearch and Editor

Amazon.com Inc

AMZN

1.89

Facebook Inc Class A

FB

1.87

Fund Reports

4

Alphabet Inc Class A

GOOGL

1.80

Large-growth fund managers are stupid again. Only 24% beat the Russell 1000 Growth Index for the 10 years ended 2014 . Investors have noted the stupidity and have taken out $29 billion from open-end large-growth managers in the first nine months of 2015 . (Not that performance versus benchmark is the only factor in those flow figures.) It wasn’t so long ago that large-growth managers were smart. At the end of 2009 , 78% had outper- formed the Russell 1000 Growth. That’s a pretty dramatic swing considering we are looking at the 10 -year trend rather than a couple of calendar years. Large growth is unique in the extremes of success versus the index. There are a couple of structural reasons that the large- growth managers swing from being Albert Einstein to being Homer Simpson. First, this is where great growth stories wind up. Whether it’s Apple AAPL , Facebook FB , AOL , or Amgen AMGN , a fast-growing company that the market values highly will end up in large growth. Because the Russell 1000 Growth Index is market-cap-weighted, the biggest, most popular stocks are included and with big weightings. The table on this page shows how the Russell 1000 Growth Index looks today.

Artisan Global Opportunities DFA US Micro Cap T. Rowe Price High Yield

Alphabet Inc Class C Capital Stock

GOOG

1.76

Verizon Communications Inc

VZ

1.68

Walt Disney Co

DIS

1.67

Morningstar Research

7

Gilead Sciences Inc

GILD

1.49

The Best and Worst 529 Plans

Coca-Cola Co

KO

1.49

Data as of 09/30/2015. Note: Alphabet is Google’s new name.

The Contrarian

10

Why Asset-Timing is Hard

the performance of large-growth funds competing with the index. A manager who thinks Apple will outperform and who wants to beat the index will have to have 7% or more in the name. A recent Apple rally has largely meant a loss for active management because, even as popular as Apple is with fund managers, not many are going to have, say, 10% of assets in the stock. The current list of the index’s top holdings includes a bunch of hugely successful companies that are the envy of the business world. But the downsides are that everyone knows about them and you have to pay a big premium to own the shares. If you owned a growth fund when the dot-com bubble burst, you know just how painful it can be when those hyped stocks falter. This is the place where price risk lives. I mentioned AOL as an example of the extreme flops that can inhabit the top of large growth, though more often it is just a long disappointment like an Intel INTC or McDonald’s MCD .

Red Flags

11

Tax Season Makes These Funds Scary

Market Overview

12

Leaders & Laggards

13

Manager Changes and News

14

Portfolio Matters

16

7 Tips for RMD Season

Tracking Morningstar

18

Analyst Ratings

Income Strategist

20

How Much Emerging-Markets Debt Does Your Fund Have?

Changes to the 500

22

FundInvestor 500 Spotlight

23

Follow Russ on Twitter @RussKinnel

As you can see, growth darling Apple has an outsized impact on the index’s performance and, therefore,

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