3 Unloved Funds With High Ratings

Despite the market rally behind large-cap stocks, most active large-cap funds have been shedding assets. In 2024, the large-growth, large-blend, and large-value Morningstar Categories collectively experienced $176 billion in outflows through August. In some cases, investors are pulling assets from funds that Morningstar analysts think are set up for success. Below are three funds that earn top marks from Morningstar analysts despite experiencing net outflows for the past three years.

Primecap Odyssey Stock’s POSKX unique approach implemented by a talented team makes it a compelling investment. Five seasoned managers each spearhead a particular sleeve with the support of about a dozen analysts. Each manager is allocated a portion of the fund’s asset base and aims to find and invest in companies that have high potential for growth because they are still growing, have gone under the radar, or are clouded by controversy. Eschewing a star manager approach allows for different perspectives to make their way into the portfolio.

Since the managers are unconstrained by a benchmark, they can pursue their best ideas, and the portfolio’s composition can differ from typical bogies. For example, the team favors finding bright spots that the market may have missed rather than investing in the mega-cap names that largely trounced the market over the past decade. Exposure to mega-caps typically lies between 30% and 40% of assets versus the S&P 500’s 50% share.

An experienced and established investment committee crafts Dodge & Cox Stock DODGX. CIO David Hoeft and director of research Steven Voorhis are joined by five other industry veterans on Dodge & Cox’s US equity investment committee. By opting for a team approach fostered by collaboration, the fund benefits from diverse talent and bypasses key-manager risk. The managers also don’t work in a silo and lean on the extensive research team. They implement a bottom-up approach that targets out-of-favor stocks with competitive advantages, good growth potential, and talented executives. They emphasize security selection as a driver of performance rather than sector exposures.

A key differentiator here is the team’s risk-management process, which has improved over the past decade with updates that include building out capabilities and in-house tools for portfolio exposures and position sizing. The team has built an attractive total- and risk-adjusted return record. Over the five years through August 2024, the fund topped 93% of its large-cap value peers. Its Sharpe ratio of 0.67 over that same period was 11 basis points above the average peer’s.

Steve Wymer, one of the industry’s longest-tenured large-growth managers, steers Fidelity Growth Company FDGRX. Since he took charge in January 1997 through August 2024, the fund’s annualized return of 13.0% easily outpaced its benchmark’s (the Russell 3000 Growth Index) 9.9% and the average large-growth peer’s 8.7%.

Wymer searches rapidly expanding markets to select names that have unique products, strong pricing power, or management teams that are focused on long-term goals and aligned with shareholder interests. The asset base is fairly large, and the fund is closed to new investors despite the outflows. One of Wymer’s strengths is discovering up-and-coming firms, which has caused deviation from the benchmark and tilts the market cap slightly lower here. Lately, performance has been driven by Nvidia NVDA. As of July 2024, Nvidia made up 15.9% of the portfolio’s assets, over 5 percentage points more than its next largest holding, Apple AAPL.

This article first appeared in the September 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.