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Kinnel: Do Large-Growth Outflows Matter?

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Actively managed large-cap growth funds have been seeing outflows, but does that make them a buy? Joining me to discuss that topic is Russ Kinnel. He is director of manager research for Morningstar.

Russ, you wrote an article in the latest issue of Morningstar FundInvestor where you looked specifically at Fidelity Magellan and noted that it has been seeing asset outflows recently and you unpacked the significance or lack thereof of that. But let's talk about large-cap growth funds more broadly. As a group they have been seeing significant asset outflows; these are the actively managed funds. You've written in the past about how outflows from a given category can sometimes be a little bit of a buy signal, a contrarian indicator. What's your take on this particular category of large-cap growth funds?

Russ Kinnel: That's right. The contrarian flow view has been signaling buy on large growth for really 10 years, and it was correct. It was a great time to buy; large growth has performed very well. Do I think that means it's going to keep being the outperformer? Probably not. I think there are some reasons to have a little skepticism about flows and certainly to take a single-minded view that that's all you need to know.

Benz: One thing we've been seeing in the past five years or even stretching back further than that is that investors have been dumping actively managed funds and buying sort of total market index funds instead. Do you think that explains some of the outflows we've seen from large-cap growth funds in particular?

Kinnel: It does, and it suggests that people are not making as dramatic a change in their portfolios or giving up on growth the way those outflow numbers suggest. Because, if, say, you are taking money out of a really diversified large-growth fund like Growth Fund of America and you are putting it in a total stock market index fund, you are modestly shifting some money out of growth and into the value side. Obviously, a total stock market fund is cap-weighted, so it's got all those big tech names that dominate the growth side anyway. It's just really a fairly subtle shift out of growth and in with some holdings in blend and value.

Benz: Those FAANG stocks that have been leading the way for large-cap growth funds are quite well-represented in the total market index funds.

Kinnel: Right. And if you think about some of these really big large-growth funds, they have probably got 100 to 300 names to begin with. You are going from, let's say, a 200-name growth portfolio to a 1,000 or 3,000-name total market fund. You are still being slightly more diversified. But again, it's not a dramatic shift.

Benz: You also note that not every large-growth fund has been seeing outflows, that the better-performing large-cap growth funds, those with 4 or 5 stars, have actually been seeing decent inflows?

Kinnel: There was an article suggesting that the fact that Magellan has beaten the S&P 500 and is still in outflows, does that mean active management is doomed. But Magellan has been a 1 to 3-star fund over the manager's tenure. So, it's easy to see why it wouldn't be a big draw. If you look at 4 and 5-star large-growth funds, they are actually getting inflows. So, for the star rating being a quantitative measure of past performance, so, again, in other way of saying, funds have performed really in large-growth continue to draw money.

Benz: You have also pointed out that even though the category, large-cap growth category, has been seeing outflows, there are some giant funds that remain in this category. Let's talk about some of those.

Kinnel: That's right. If you look at funds like Growth Fund of America, Contrafund, some of the other really big funds, on the one hand they are getting outflows--though for Contrafund, it's really just a trickle--but on the other hand, the market is appreciating tremendously. Some are actually growing their total assets under management or maybe shrinking a little. To me, that's a good thing. I mean, when you look at an actively managed fund, that's over $70 billion or $100 billion, I would like for them to be in steady outflows, not dramatic outflows because that's a problem. But a trickle of outflows is probably the best situation possible.

Benz: Can you provide any broad guidance for investors in terms of how they should approach this growth to value split within their portfolios given that we have seen value investing, value stocks underperform growth for so long? How should investors be approaching that today?

Kinnel: I think generally you want to have roughly the same amount, but I don't think you need to worry about it too much. If say, you've got 2% more in growth and value, who cares? But if it becomes dramatic, you probably want to shift because, as you know, every once in a while the market shifts dramatically. We've had a couple of times where leadership shifted dramatically from growth to value, and you don't want to miss out; or conversely it could be a time when large growth is going to lose a lot of money. I generally wouldn't want too far with that over- or underweighting unless you really have some strong reason behind that overweighting.

Benz: Russ, thank you so much for being here to share your insights.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com