25 April 2021
Returns in USD terms over the 5 months to 31st March 2021
Source: Morningstar, MGIM.
What this chart shows This week, rather than show an economic or market trend, we thought we would show a recent dynamic within the realm of fund selection. Whilst a bit simplistic, one often sees equity funds categorised as ‘value’ or ‘growth’, the former targeting companies that trade below their intrinsic values, the latter targeting companies growing faster than the wider market or those where a fund manager’s expectations exceed the market consensus.
Of course, a fund can target both and you might see these labelled as ‘core’ or ‘blend’ funds. This chart plots the five month returns to the end of March 2021 (so covering the period since the coronavirus vaccine news arose) of all the funds within Morningstar’s global equity fund universe, ranging from lowest to highest. The red bars represent the returns of growth managers using Morningstar’s style classifications, whilst the grey bars represent all other funds. Generally, growth managers have performed worse since the vaccine news in early November. Why this chart is relevant Of course, this relates to a broader market dynamic that has seen value stocks stage something of a recovery in recent months post the vaccine news which sparked what has become known as the reflation or reopening trade. Reviewing the same chart but looking at returns for much of the past decade would see the red bars skewed heavily to the right side.
The optimism of recovery fuelled by the vaccines lifted sectors and stocks that are seldom held in growth funds (think banks, energy, miners) and left behind the sectors and stocks that do feature more (think technology, certain consumer discretionary and communication names). Swings in sentiment can happen very abruptly, as November proved, and having all your portfolio eggs in one investment style basket can come back to bite. Instead, diversification across styles can certainly help to smooth the journey over time.
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