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Portfolio > Mutual Funds > Equity Funds

Equity Funds Rule in 2016: Morningstar

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Though the past 12 months have been full of unexpected news, they generally have been good for U.S. equities, according to Morningstar. In fact, the S&P 500 is up about 13% through Dec. 23. Plus, the small-cap-oriented Russell 2000 Index has roared ahead over 22%.

How have these gains played out in different sectors and fund groups? Morningstar analyst Andrew Daniels, a CFA and CMA, breaks down the results in an online report on equity performance, which he published Friday.

Top Sectors

Within the Russell 3000 Index, energy and basic-materials stocks “led the way in 2016,” Daniels says. Both groups improved more than 23%. This gain came after several years of horrific performance, he points out.

Commodity prices dropped sharply in recent years as the world’s oil supply topped demand and concerns about global economic growth grew. But after the first few months of the year, that picture changed.

Within the energy group, the Morningstar analyst says, top performers include midstream oil companies that move the commodity, such as Oneok and Spectra Energy, along with integrated oil giant Chevron.

As for basic materials, U.S. Steel and AK Steel soared about 350% as the U.S. imposed tariffs on Chinese steel imports.

In financials, Comerica and Regions Financial have seen jumps of over 50%. The group overall or is up 22%; investors are convinced that a Donald Trump presidency means higher interest rates and a rollback of Dodd-Frank regulations, Daniels says.

Health care, which has drawn the attention of politicians from both parties, was the best-performing sector from 2013 to 2015, but it is down nearly 3% so far this year.

Some biotech stocks, like Alexion, Regeneron and Vertex are off more than 25% as the government began looking more closely at drug-pricing practices.

As for dividend-heavy consumer defensive and real estate stocks, they also have had a poor showing in 2016 vs. other sections, though both are still up 6% or more thanks to raising interest rates.

Morningstar Style Boxes

“This year marked a return to the historical norm: Small-cap stocks outperformed their larger-cap counterparts for the year to date through Dec. 23,” explained Daniels.

The top-performing category in the Morningstar Style Box for the first time since 2008 in 2016 is small value, up 27%.

The Royce Opportunity Fund, for instance, outperformed a whopping 84% of its small-value peers and rose 32% in 2016. The fund’s largest holdings include basic materials and technology stocks.

“The fund was also helped by its underweighting to poor-performing health care stocks,” the Morningstar analyst said.

Results for the small-blend group in 2016 are a strong 22% gain. The Mairs & Power Small Cap fund topped 93% of its peers with a 28% increase. It has made some good bets in the industrial machinery space — Oshkosh, Donaldson and Toro — all up 50% or more this year.

In the large-value category, funds posted an average gain of 16% in 2016. Strong performers in this group include Fairholme Fund, managed by Bruce Berkowitz.

“The fund’s bets have recently paid off, as its large stake in Fannie Mae and Freddie Mac preferreds has done well,” Daniels stated. “Additionally, the fund has benefited from its lack of exposure to the poor-performing health care sector.”

Large growth ends the year as the worst-performing category, with a gain of just 4%. The Sequoia Fund, for example, had a large position in Valeant, the drugmaker that came under fire for steep price increases.

Morningstar has listed some of the top-performing equity funds in 2016 by style-box category.



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