Jeffrey Schumacher

There remain dedicated value investors who, with relentless perseverance, scour the US stock market in search of overlooked gems that can shine once again.

Dividend funds have long been a stalwart for investors seeking reliable income. Traditionally, these funds focus on stocks that offer high and dependable dividends, often from companies with strong cash flow, solid market positions, and healthy balance sheets. 

Increased concentration in equity markets has emerged as a significant concern for investors. The rising dominance of US companies globally, notably the pronounced influence of the technology sector in major stock indices, is typified by the hegemony of a small cadre of prominent stocks, colloquially known as the “Magnificent Seven.” This phenomenon continues to captivate market participants, though signs of vulnerability in the supremacy of these seven market stalwarts are beginning to surface.

We embark on the second quarter with the launch of a revised feature: the Morningstar Fund Radar. In this weekly column, succeeding the previous Top 5 analysis, Morningstar’s fund analysts examine the state of affairs within a particular asset class, then delve into one or several mutual funds, with the primary selection criterion being the Morningstar Medalist Rating. As customary, we commence the new quarter with an overview of global equity funds.

Active funds collectively underperform compared to their passive counterparts, primarily due to their struggle to remain competitive over time. However, exceptions exist, such as global dividend funds, which consistently outperform in this challenging environment.

A turbulent first half of the year has had a clear impact on fund flows, with renewed investor interest in bond funds, increased focus on emerging markets, and continued growth of passive strategies defining the landscape for the first six months of 2023. BlackRock’s iShares and Vanguard led the pack in terms of inflows during the first half. 

AI funds are offering investors the opportunity to capitalize on the burgeoning interest and opportunities that Artificial Intelligence presents. Using the Consensus Purity Score, Morningstar was able to rank funds based on their pure exposure to the AI theme. A top 5.

After years of dominance by growth stocks, dividend funds had slowly become the wallflowers of the investment universe. Investors flocked to technology, e-commerce and internet companies, which emerged as the stars in the stock market firmament partly due to the corona crisis and the resulting generous monetary policy of central banks. Barring some brief periods of outperformance, value stocks slid deeper and deeper into the mothball bin. However, a value renaissance began in late 2020, which received a firm tailwind in 2022.

The year 2022 will go down in the books as a pitch-black year for investors. A cocktail of worrying developments, including a spike in inflation, tightening monetary policy, the economic implications of Russia’s invasion of Ukraine, an energy crisis and recession fears, resulted in a historically bad investment year in which both equity and bond investors suffered hefty losses.

The final quarter of a stock market year that many investors were keen to put behind them was marked by a number of notable and abrupt changes.  Only one global equity fund, the Gavekal Global Equities Fund, managed to close the year with a double-digit return for 2022.