US growth stocks had an excellent year in 2023. Although the Magnificent Seven pulled the cart, they were certainly not the only stocks to record a strong performance. And yet, despite the magnificent returns, investors seem wary and are now withdrawing money from funds investing in this market segment.
When mentioning US growth stocks, thoughts will quickly turn to the much-discussed Magnificent Seven, or Apple (44 percent share price gain in 2023, Alphabet (53 percent), Amazon (75 percent), Meta (184 percent), Microsoft (53 percent), Nvidia (228 percent) and Tesla (95 percent). Not without reason, because as these 2023 returns show, they had a magnificent year last year. Collectively, they accounted for about two-thirds of the returns for the Morningstar US Large-Mid Cap Broad Growth index, which rose by almost 32 percent last year, and represented almost 29 percent of the index as of the end of 2023.
Despite this dominance, they were certainly not the only stocks that saw strong performance in 2023. Within the 600-plus-share index, there were 14 other companies whose share price at least doubled, including Coinbase Global, Uber Technologies and Advanced Microdevices. There were also 61 stocks whose share price rose by 50 to 100 percent.
The biggest common denominator was that these companies operate in the technology sector. Therefore, with a return of over 60 percent in 2023, the sector managed to stand out from other sectors within the index, although communication services and cyclical consumer goods also had a fine year with returns of 48 percent and 47 perccent, respectively.
Poor sense of timing
Despite this good performance, investors did not flock to funds in the Morningstar US Large-cap Growth Equity category. On the contrary, they even tapped four billion euro from funds sold in Europe. This, by the way, fits the trend that has emerged since 2021, as every calendar year since then has seen net outflows on an annualised basis, with the low point being the year 2022 when as much as 15 billion euro flowed out. In doing so, investors once again showed a poor sense of timing, by the way, as selling investors missed the boat in the following year.
Over the longer term, too, fund investors do not seem to be moving en masse towards US growth stocks. Indeed, over the past decade, funds in this category also recorded net outflows of more than 12 billion euro. Despite this, assets under management in US growth equity funds tripled from 55 billion at the end of 2014 to 145 billion by July 2024. This is thus entirely due to strong performance. This was not only in 2023. The years 2021 (32 percent), 2020 (26 percent) and 2019 (37 percent) marked a boom period for US growth stocks.
In the current year, through early September, the Morningstar US Large-Mid Cap Broad Growth index recorded a nice plus of 13 percent. But the select group of seven US growth stocks shows a less unambiguous picture. For instance, Nvidia shares are at a solid plus of 114 percent as of early September, despite more recent share price losses due to doubts about high expectations for growth in the AI market. Meta also put in a solid performance with a plus of 45 percent. However, the other stocks performed more in line with the index, with Tesla even lagging behind with a 12 percent loss.
Stable team
The strategies that appear prominently on Morningstar’s radar have a solid management team and investment process in the qualitative opinion of the fund analysts, or these qualifications are attributed based on an algorithm that evaluates mutual funds based on the same framework as the fund analysts. In this edition, we highlight a fund that meets all these criteria. Loomis Sayles US Growth Equity receives an Above Average rating from Morningstar’s analysts on the People Pillar and even the highest possible rating of High on Process Pillar. This results in a Morningstar Medalist Rating of Silver.
The fund is led by Aziz Hamzaogullari, who launched the strategy in 2006, while still at Evergreen Investments. In 2010, he and three analysts moved to Loomis Sayles, and he has since strengthened the analyst team with five new analysts, whom he trained himself. The team is particularly stable, as over this period no analyst has left the team. Although the team manages multiple strategies, the workload is not a cause for concern, as the concentrated portfolios have a strong overlap in positions and total only just over 70 different stocks.
The approach is based on identifying companies with strong competitive advantages, while observing a long investment horizon. Companies should have a strong business model with drivers that should be able to sustain growth, particularly free cash flow, over the next five years. Hamzaogullari is not afraid to make outspoken choices, as the portfolio normally consists of only 30 to 40 positions.
Hamzaogullari applies a solid diversification of his investments across various sectors. While half of the Morningstar US Large-Mid Cap Broad Growth index is made up of technology stocks, this sector accounts for only 30 percent in this portfolio. In contrast, the communication services and healthcare sectors are overweight.
The fund had an excellent 2023, convincingly beating the benchmark with a return of almost 46 percent, and the first eight months of 2024 also saw another outperformance, albeit more modest. The best-performing stocks in the portfolio this year include top 10 positions Nvidia and Meta, as well as Intuitive Surgical, Netflix and Oracle.
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners.