Midcap equity mutual funds led the pack in Chicago-based Morningstar Inc.s ranking of the top-performing mutual funds most used in defined contribution plans for the year ended June 30.
Four of the top five funds and six of the top 10 were midcap, while large-cap funds predominated the top 25. There were no small-cap funds among the top 25. Also, 12 of the top 25 were value funds, 11 were growth, and two were blended. Value funds had dominated for the year ended March 31, with 22 of the top 25.
(For tables ranking the top mutual funds used by DC plans, click here)
The latest ranking found the top 10 equity managers delivered gains of between 24.7% and 29.3% for the year ended June 30. For the same period, the Russell 3000 index gained 7.11%.
The Fidelity Leveraged Company Stock fund, a midcap blend, took the top spots for the one- and five-years ended June 30. The mutual fund returned 29.33% for the year ended March 31 and an annualized 37.92% for the five years. The midcap Fidelity Aggressive Growth fund, in second place for the year, returned 27.43%, and the large-cap Fidelity OTC Portfolio fund, in third place, returned 26.64%.
The Fidelity Real Estate Fund, which came in at No. 4 in the five-year listing, was ranked last for the year ended June 30, with returns of 9.26%. Some measures of valuations for REITs reached all-time highs, and thus far this year we have witnessed a pullback, or correction, in the sector after this record-setting run, Fidelity spokeswoman Sophie Launay said in an e-mail. Steven Buller, manager of the fund, was not available for comment.
The T. Rowe Price Midcap Value fund placed fourth in the 12-month ranking, with 26.37%; and Federated Kauffman came in fifth, with 26.34%.
Among fixed-income funds, Fidelity Advisor High Income Advantage had the best performance for both the one- and five-year periods ended June 30, returning 19.92% for the year and an annualized 18.3% over the five years. The Pioneer High Yield-Y fund was in second place, with a 15.59% return, followed by Fidelity Capital & Income, 15.28%; Loomis Sayles Strategic Income, 12.45%; and BlackRock High Income, 12.16%. All five funds were also in the top five for the year ended March 30, except the Loomis Sayles fund, which placed 10th .
Thomas Soviero, lead manager for the $8 billion Fidelity Leveraged Company Stock and $3 billion Fidelity Advisor High Income Advantage funds, said both funds fill unique niches. They are flexible funds that invest in companies that rely on global resources, Mr. Soviero said. The high income fund has increased its investments in the cable sector and the airline industry over the past 12 months, while the leveraged stock fund invests heavily in companies such as Freeport-McMoRan Copper & Gold Inc. that have benefited from global growth, he said.
Ruth Falck, a senior consultant with Watson Wyatt Investment Consulting, New York, said her firm has seen a distinct trend toward growth funds over the past year. Value has had a very long run and growth has become more undervalued; theres more opportunity there, she said.
Steve Calhoun, portfolio manager of the $4 billion Fidelity Aggressive Growth fund, said his fund provides a one-stop shop for growth exposure. For the longest time it was a REIT market, it was an energy or utility market, it was a financial market, he said. Interest in growth strategies is just starting to perk up, opening the door to more interest in technology, health care and other growth areas.
Agriculture-based investments were some of the greatest contributors to the funds second-quarter return, Mr. Calhoun said. The fund is overweight in fertilizer and tractor companies, he said.
David Wallack, manager of the T. Rowe Price Midcap Value fund, said his fund has succeeded by generating alpha through individual stock picks, not sector weighting. We take a bottom-up view, and we dont try to make directional picks based on interest rates or the economy, he said. He declined to specify any of the stocks.
Ms. Falck said that brand recognition and investor inertia is keeping some funds among those most used by DC plans. Sometimes that sense of loyalty to a particular fund continues once a fund starts to underperform, she said.
It takes an enormous amount of effort to replace a fund, she said. Plans dont change funds all that often, and there are some funds that have been around forever, she said.
Historically, the biggest (concentrations of) assets have been in American Funds and Fidelity, which have an enormous number of clients, she said. Vanguard, which has funds in four of the top 25 spots, is also popular for its low fees, she said.
Rounding off the top 10 funds in the year ended June 30 were the T. Rowe Price Science & Technology fund, which returned 26.19%; Hartford Midcap, 26.16%; Hartford Capital Appreciation HLS, 25.25%; BlackRock Basic Value, 25.11%; and Fidelity Advisor Midcap, 24.73%.
The rest of the top five for equity funds for the five years ended June 30 was Hartford Capital Appreciation HLS in second place with a 19.24% return, followed by Lord Abbett Small-cap Value Y, 18.94%; Fidelity Real Estate Investment, 18.55%, and Lord Abbett Small-cap Value A, 18.53%.
The rest of the top five for bond funds for the five years ended June 30 was Fidelity Capital & Income, which came in second with a 17.07% return, followed by Loomis Sayles Strategic Income, 14.96%; Loomis Sayles Bond fund, 13.44%; and American Funds High Income, 12.66%.