It was a relatively calm quarter for domestic-stock funds.
After a volatile first half in which growth stocks posted double-digit gains while energy stocks suffered big losses, U.S. stocks settled down in 2017’s third quarter. With the U.S. economy slowly chugging along, corporate earnings producing few major surprises, and oil prices on the rise after sinking in the year’s first half, the major stock indexes all produced modest single-digit gains for the quarter, with the S&P 500 hitting new all-time highs. Although there was plenty of news, including devastation from hurricanes and continued political turmoil in Washington, D.C., the markets mostly shrugged it off.
This relative steadiness extended across the universe of domestic-stock funds. All nine sections of the Morningstar Style Box had average gains of between 2.8% and 5.1% for the quarter through Sept. 28, tightly clustered around the S&P 500’s 4% return over the same period. Returns for sector funds were a bit more dispersed, but not by much; the worst performers were real estate and consumer defensive funds, which were roughly flat for the quarter, while energy, natural resources, and technology funds gained more than 7% on average.
Individual U.S. stock funds showed a similarly narrow range of results in the third quarter. Out of the 460 funds in the nine Morningstar Style Box sections that have a Morningstar Analyst Rating, none gained more than 10% for the quarter through Sept. 28, and only a handful lost money. Even so, there were some definite winners and losers among individual funds. Here are some of the more prominent ones.
Fairholme FAIRX was one of the worst-performing large-cap stock funds in the first half of 2017, mainly because of heavy losses by its holdings in Fannie Mae and Freddie Mac preferred shares. In the third quarter, those same preferred shares rebounded strongly to gain more than 20%, propelling the fund to the top 1% of the large-value Morningstar Category for the quarter through Sept. 28. This whiplash-inducing shift illustrates the feast-or-famine nature of this Neutral-rated fund’s results, driven by manager Bruce Berkowitz’s huge bets on often illiquid securities.
Small-value Royce Opportunity RYPNX and small-growth Royce Premier RYPRXboth sport strong long-term records and Analyst Ratings of Bronze, but both struggled in 2014 and 2015 before rebounding with gains of more than 20% in 2016. Both were also among the best performers in their respective categories in the third quarter of this year, but they achieved this with almost entirely different stocks, chosen by different management teams. The main thing these funds have in common is Royce's expertise in fundamentally driven small-cap stock-picking.
Silver-rated Akre Focus AKRIX gained 9.6% for the quarter through Sept. 28, putting it in the top 1% of the large-growth category over that time. Manager Chuck Akre maintains a concentrated portfolio of around 25 stocks, so a few holdings can have a big effect on returns. While top holding American Tower AMT was basically flat in the third quarter, several other big positions posted nice gains, including Moody's MCO, Mastercard MA, Visa V, Dollar Tree DLTR, and CarMax KMX.
Gold-rated American Funds New Economy ANEFX has struggled for most of the past few years, but it has started to look much better in 2017, and a strong third quarter has boosted it into the large-growth category’s top decile for the year to date. The biggest drivers of these great recent returns have been top-five holding Kite Pharma KITE, which gained more than 80% for the quarter, plus top-10 holdings Netflix NFLX, Tencent Holdings, and Alibaba BABA.
The recent performance of Neutral-rated Morgan Stanley Institutional Small Company Growth MSSGX shows what can happen when a high-conviction portfolio's picks go south. Manager Dennis Lynch and his team are known for holding early-stage growth names, sometimes including firms that haven't yet gone public. This approach has sometimes worked very well in the past, including in the first half of 2017, but in the third quarter the fund fell to the bottom of its small-growth peer group. This was due to double-digit losses by top holding Athenahealth ATHN and several other stocks, such as Ellie Mae ELLI, Zillow Group Z, and Shutterstock SSTK.