The fact that stocks have been more volatile in recent years should not be surprising. After all, the trailing five-year period through October 2024 included the pandemic drop and rebound, two presidential elections, and the fastest interest-rate-hiking period in the US history. Over the period, the five-year standard deviation of US stocks (as measured by the Morningstar US Market Index) rose to 18.6% from 15.8% three years before (which still includes the pandemic) and 12.2% for the five years before the pandemic. Volatility isn’t necessarily bad for investors, but too much of it can make it harder to stay invested and take advantage of the power of compounding over longer periods.
Some stock funds have made that harder for their investors than others. We looked at four stock funds in the Morningstar FundInvestor 500 that had the highest recent volatility relative to their benchmarks in the Morningstar 500. All have Morningstar Medalist Ratings of Silver or Bronze, so they’re not sell candidates, but their risks are worth noting.
Portfolio manager Dennis Lynch’s large-growth Morgan Stanley Institutional Growth MSEGX and mid-growth Morgan Stanley Institutional Discovery MACGX funds posted the largest volatility increases of the M500. While their respective benchmarks—the Russell 1000 Growth and the Russell Midcap Growth indexes—were about 60% more volatile than they were before the pandemic, these funds’ current five-year volatility levels—at 33.7% and 36.6%, respectively—are about double their prepandemic levels of 16.7% and 18.9%.
Lynch has built these funds for speed, opting for early-stage companies new to public markets that sport rapid top-line growth—but also meager current earnings and highly uncertain futures. That helps drive volatility to extremes, as does portfolio concentration (30-40 holdings in the large-cap fund, 30 to 50 in the mid-cap one). Steep losses in 2022’s global equity selloff provided a stark reminder of these funds’ volatile nature. Still, the funds rebounded in 2023 by rising approximately 50%, easily beating their benchmarks. That was especially impressive for the large-cap fund, whose significant outperformance was observed despite scant holdings in the index’s soaring mega-cap stocks. A best-in-class investment team should help ameliorate concerns and encourage a long-term mindset for investors in both these funds.
The growth-reversal story has been similar for Baron Global Advantage BGAFX. Manager Alex Umansky also runs a concentrated portfolio of 40-60 stocks, although he searches globally and across the market-cap spectrum for opportunities. While he limits individual positions to 5% at the time of purchase, pockets of concentration can emerge. The portfolio once held more than 55% of its assets in the top 10 holdings, nearly 60% of its assets in tech stocks, and more than 10% in a single stock. The fund’s volatility typically outpaces that of the MSCI ACWI and has further increased the gap recently, with current five-year volatility at 27.0% versus the index’s 17.4%. While the fund’s more than 50% loss as growth stocks tumbled in 2022 fit its character, it wasn’t followed by an outperforming bounce in 2023 like the Morgan Stanley funds posted. Still, this Bronze-rated fund should regain its footing.
Lewis Kaufman’s approach at Artisan Developing World ARTYX doesn’t shoot for the moon. This emerging-markets fund is another concentrated portfolio at 30-50 names, but Kaufman focuses on financially sound companies with positive free cash flow and good business models. He prefers larger-cap names and supplements the portfolio with developed-markets-based firms that have significant economic ties to the developing world. Still, the fund’s 2022 loss more than doubled that of the MSCI Emerging Markets Index. And while the index’s current volatility of 18.7% is 12.0% higher than it was three years ago, the fund’s volatility of 24.3% is 40.0% higher. But, as with some other funds above, Kaufman has steered the portfolio back to its winning ways since 2022, and investors should take comfort in its Above Average People and Process ratings.
This article first appeared in the October 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.
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