Fund Spotlight

The Fidelity Blue Chip Growth Fund (FBGRX) has been a leading performer in Morningstar’s large-growth category. Established nearly 30 years ago, the fund seeks to provide long-term capital growth by investing approximately 80 percent of assets under management (AUM) in blue chip common stock. The fund attempts to outperform the returns of the Russell 1000 Growth Index, the underlying benchmark, before fees and expenses. This fund is a core holding in many portfolios and has been under the direction of Sonu Kalra since July 2009.

Investment Strategy

Kalra prefers to invest in companies with the potential to grow their earnings at least 10 percent per annum over the longer term. Kalra also focuses on improving returns on equity and invested capital, product life cycles, and management changes, favoring firms with sustainable business models. Kalra supplements his traditional investments with cyclical picks, smaller-market-cap companies and select private equity investments. FBGRX is more growth-oriented than its underlying benchmark, exemplified by holdings like Uber, which has rapidly grown into a top 30 holding. While these nontraditional investments boost performance, they also increase volatility.

Sometimes funds are accused of being “closet indexers” due to their high overlap with their benchmark, but that cannot be claimed of FBGRX. Kalra has increased the number of holdings due to the strong IPO market and in an attempt to balance the fund and keep top holdings from becoming too highly concentrated as a percentage of assets. The fund typically overlaps the underlying benchmark index by approximately 50 percent.

Kalra has beaten the large-cap growth category for every year except 2011, when he underperformed by a mere 0.3 percent. He has yet to face a major market downturn while managing the fund, but when he oversaw the Fidelity OTC Portfolio (FOCPX), the fund experienced a 46 percent loss during 2008, about 6 percent worse than the category of large growth and 4 percent worse than the Nasdaq 100.

Portfolio Composition and Holdings

As of the end of October 2015, this four-star rated Morningstar fund had $21 billion in AUM spread across 390 individual holdings. The portfolio has a 91 percent exposure to domestic equities and an 8 percent exposure to foreign issues with a concentration in Developed Europe and Emerging Asia. The fund is overweight its benchmark in consumer cyclical and technology shares and underweight basic materials and industrial stocks. Although the fund does hold shares of some well-known names in financials and health care, it is also underweight these sectors.

The portfolio features an average market cap weighting of $53 billion and has 50 percent of assets in giant-cap shares as well as 30 percent in large-caps, 12 percent in mid-cap shares, 7 percent exposure to small-cap shares and a small 1 percent position in micro-cap stocks. FBGRX has a price-to-earnings ratio of 23.5 and a price-to-book ratio of 3.27.

Slightly more than 30 percent of assets are allocated to the top 10 holdings. In descending order, they are Apple (AAPL), Alphabet Class A (GOOGL), Amazon (AMZN), Facebook (FB), Alphabet Class C (GOOG), Gilead Sciences (GILD), Salesforce.com (CRM), Home Depot (HD), Visa (V) and Allergan PLC (AGN). These holdings reflect Kalra’s previous experience running the tech-heavy Fidelity OTC Portfolio (FOCPX), with a strong preference for Internet companies versus technology benchmark mainstays such as IBM, Microsoft and Oracle, which FBGRX lacks. The fund’s growth-oriented stance is enhanced by its above-average stake in biotechnology shares and its position in Uber.

Historical Performance

FBGRX has averaged better than 20 percent annualized gains and beaten its underlying benchmark by an annualized 2.7 percent over the past 5 years. FBGRX has also outperformed 92 percent of its large-growth category peers during this period. Kalra has demonstrated adroit overall stock-picking skills. While positions in Biogen (BIIB), CF Industries (CF) and Keurig Green Mountain (GMCR) have proved to detract from overall performance in the past, the fund’s positions in Alphabet, Amazon, Facebook, Starbucks (SBUX) and Avago Technologies (AVGO) far surpassed losses.

As of the end of November 2015, FBGRX has delivered 1-, 3- and 5-year total returns of 5.6 percent, 20.4 percent and 14.44 percent, respectively, significantly above the category averages of 3.41 percent, 15.55 percent and 11.82 percent.

The fund has outperformed the category average by more than 50 percent year-to-date. The mutual fund has earned a high Morningstar return rating and an above-average risk rating. FBGRX has a 3-year beta and standard deviation of 1.03 and 11.61, compared with category averages of 1.0 and 11.46.

Expenses, Fees and Distribution

FBGRX has a current expense ratio of 0.88 percent. The ratio is subject to change based on performance criteria, such as how well the fund performs against the underlying Russell 1000 Growth Index benchmark. The no-load fund does not have any 12b-1 fees. FBGRX has an initial investment minimum of $2,500. The fund had a long-term capital distribution of $0.187 per share on December 11, 2015, and $3.44 in September 2015. Calendar-minded investors should be aware that FBGRX has historically made large capital gains payouts in September, rather than December as is typical with most funds.

Outlook

FBGRX should continue to outperform despite China’s headwinds, pressure on commodity prices and changes in the currency market due to central bank interventions. Strength in the U.S. economy, a strong labor market and continued consumer confidence should bolster the economy’s growth sectors. A concentration in new and expanding markets, such as cloud services and direct-to-mobile services, has positioned FBGRX nicely for 2016.

Dividend-paying stocks remain a very attractive option for core holdings, despite the likelihood of increasing interest rates. Dividend-paying companies tend to be financially stronger than their competitors and are typically under pro-shareholder management. Over the long term, a significant portion of returns is generated by dividends, especially in a flatter year, such as 2015. Unless stocks end the year with a strong rally, dividends could easily deliver 50 percent or more of the year’s returns.

Established in 2005, the Invesco Diversified Dividend Investor Fund (LCEIX) primarily seeks long-term capital growth with a secondary focus on current income. To accomplish these goals, the fund invests in dividend-paying stocks that the portfolio manager, Meggan Walsh, and analysts believe are undervalued based on numerous metrics. In addition to domestic issues, the five-star Morningstar-rated large value fund may invest up to 25 percent of assets in foreign securities. More than $1 million of the fund manager’s personal assets and a portion of the management team’s deferred compensation are invested in LCEIX, resulting in a strong alignment between the personal goals of the management and that of its investors.

Investment Strategy

The team focuses on firms with stable management, healthy balance sheets and free cash flow growth as well as strong earnings over the next 2-to-3-year period. When selecting dividend-paying stocks, managers and analysts focus on companies that pay steady or increasing dividends. The stocks should also be at least 35 percent undervalued based on several discounting models and valuation measures. Investment ideas are run through several downside market scenarios to measure overall risk versus reward, seeking stocks with at least a 3-to-1 upside potential. Holdings are considered for removal from the portfolio when fundamentals deteriorate or the stock price drops 15 percent below the cost basis for an extended period. This measure enables the fund to generate total returns by balancing capital appreciation and income with capital preservation. The portfolio typically holds 70 to 85 stocks that cover all sectors.

The fund uses a “winning by not losing” philosophy to keep its earnings and performance up in down markets. While the fund has underperformed in strong bull markets, the tenet has enabled the fund to beat the underlying index 83 percent of the time in bear markets. LCEIX focuses on high-quality stocks with a concentration in defensive sectors. It also holds a large cash position to protect against a broad decline in the market. While limiting its upside potential, the philosophy has enabled the fund to succeed over the long term. LCEIX has 3-year upside and downside capture ratios of 86.26 and 74.65, compared with the equivalent large-value category averages of 91.76 and 109.47, respectively.

Portfolio Composition and Holdings

As of October 30, 2015, the fund has $11.79 billion under management. The fund has a 78 percent exposure to U.S. stocks and a 12 percent investment in foreign shares held entirely in the United Kingdom and developed Europe. In addition to a 31 percent exposure to giant-cap shares, the fund holds 39 percent of assets in large-caps, along with 27 percent and 3 percent in mid- and small-cap shares, respectively. The portfolio has an average market cap weighting of $28.5 billion compared with the category average of $75.6 billion, plus a price-to-earnings ratio of 18.17 and a 1.99 price-to-book ratio.

The sector weightings reflect the fund’s defensive risk/reward attitude. The portfolio is overweight consumer staples and utilities and underweight energy, healthcare, technology and financial services. The fund holds 86 individual issues, which makes it more concentrated than the average of its category peers. The top 10 holdings make up slightly more than 23 percent of total assets. In descending order, they are General Mills (GIS), Campbell Soup Company (CPB), Coca-Cola (KO), Heineken (HEINY) and AT&T (T), Eli Lilly (LLY), Kraft Heinz (KHC), Walgreens Boots Alliance (WAG), PPL Corp. (PPL) and Target (TGT). The fund has a very low 6 percent annual turnover rate, well under the Morningstar large-value category.

Historical Performance and Risk

LCEIX has above-average returns and low risk ratings from Morningstar. As of the end of October, LCEIX has delivered total 1-, 3- and 5-year returns of 5.99 percent, 14.86 percent and 12.49 percent, respectively. These compare with the category returns over the same periods of 0.80 percent, 13.10 percent and 11.18 percent. While lagging the S&P 500 slightly over the past 3- and 5-year periods, LCEIX beat the major market index over the most recent 1-year period and is on par with the index year-to-date. Strong stock picking has helped drive these results. The fund’s consumer defensive stocks have been the primary contributors to the recent performance because the sector has outperformed year-to-date.

LCEIX has a 3-year beta and standard deviation ratings of 0.77 and 8.76, respectively. These compare with the large value category averages of 0.98 and 10.84.

Fees, Expenses and Distributions

LCEIX has a 0.76 percent expense ratio and a 12b-1 expense of 0.18 percent. The fund has a minimum initial investment of $1,000 and a subsequent investment minimum of $50. The most recent quarterly income distribution occurred on September 17, totaling $0.069 per share with a reinvestment price of $18.35. Capital gain distributions are paid annually in December. The 2014 distribution equaled $0.3642 per share. The current 12-month SEC yield is 1.69 percent.

Outlook

While the fund’s prudent approach generates returns that lag the Russell 1000 in stronger markets, the investment strategy has limited its downside during bear markets. It also comes with a relatively low expense ratio for an actively managed fund. Although distributions have been limited and the yield is a bit on the low side for a dividend fund, returns have been solid. The result is a strong long-term risk-versus-reward profile that has beaten the Russell 1000 Value Index on a risk-adjusted basis since the fund’s inception. This should continue in the future as the fund’s performance during the market’s recent volatility confirms that its portfolio and prudent investment strategy are well positioned to weather a sustained market correction.

After several years of lackluster performance under previous managers, the Fidelity Magellan Fund (FMAGX) is back on track and has now beat the S&P 500 over the past 3 years. It has also outperformed the benchmark year to date in 2015. The fund has delivered total 1- and 3-year returns of 7.90 percent and 18.07 percent, respectively, plus a year-to-date return of 4.55 percent. The S&P 500 generated returns of 5.20 percent and 14.33 percent over the past 1 and 3 years, plus 2.70 in 2015. This has Magellan beating the broader market by no less than 1.85 percent over these periods.

The fund’s recent performance outshines its subpar 5-, 10- and 15-year returns of 12.73 percent, 6.23 percent and 3.05 percent, respectively, a period that saw the once high-flying fund with $100 billion in assets under management shrink to $16.6 billion due to 15 consecutive years of outflows. Compared to the S&P 500, the fund trailed by no less than 1.51 percent over those periods.

Much of the fund’s current success can be attributed to manager Jeff Feingold, who assumed the reins in late 2011. Feingold also has a significant personal stake in the fund, demonstrating that his interests are aligned with those of shareholders. Under his stewardship, Magellan has gone from a laggard to a leader, and is once again worthy of investor consideration alongside larger funds such as Contrafund (FCNTX).

Investment Strategy

Established in 1963, the two-star Morningstar-rated FMAGX is a diversified equity strategy large-cap growth fund that seeks capital appreciation. It invests in domestic and foreign stocks in both the growth and value categories across all market capitalizations and styles. Both a fundamental analysis approach and quantitative modeling are used to select particular investments that show fast business growth, quick earnings growth or value along with improving financials. Evaluation factors include margins, insider buying, cash flow and returns on invested capital.

While the fund sticks closely to the weightings of its S&P 500 benchmark, it does favor growth stocks. Feingold also includes cyclical plays similar to his management style overseeing the Fidelity Trend Fund (FTRNX). An eye toward mid- and small-cap shares keeps the market cap weighting below that of the benchmark. In addition to a close working relationship with a quantitative analyst, Feingold can rely on more than 130 global equity analysts at Fidelity.

Portfolio Composition and Holdings

The fund manager uses a balanced approach that incorporates high-quality names when constructing the portfolio as well as stock, sector and style diversification as a way to reduce the volatility associated with growth stocks. FMAGX has a 47 percent exposure to giant-cap shares as well as 35 percent and 16 percent exposures to large- and mid-cap shares, respectively. The fund also holds a small 2 percent stake in small-cap stocks. Containing 142 individual issues, most assets are invested in the information technology, financials, healthcare and consumer discretionary sectors. Relative to the S&P 500 Index, all of these sectors are overweight, led by more than 5 percentage points of exposure added to healthcare. Combined, these four sectors account for 79 percent of the fund’s assets. All four of these sectors have done well in 2015 and aside from consumer discretionary, the fundamental outlook for these sectors remains bright, particularly the financial sector. Financials do well when interest rates are rising, and as soon as the Fed decides to hike rates, we’ll be in a rising rate cycle that favors the sector.

FMAGX has a 91 percent allocation in domestic equities and the remainder overseas, predominantly in developed markets in Europe. The fund is quite diversified, as the top 10 holdings only make up 24 percent of assets under management. The top issues in descending order are Apple (AAPL), General Electric (GE), J.P. Morgan (JPM), Berkshire Hathaway (BRKA) and Amazon (AMZN). Shares of Medtronic (MDT), Bank of America (BAC), Citigroup (C), American Tower (AMT) and LyondellBasell (LYB) round out the top 10. FMAGX has an average market cap weighting of approximately $57 billion, a P/E ratio of 18.35 and a price-to-book ratio of 2.52. Compared to the large-growth category, FMAGX has a small average market cap, as well as lower P/E and lower book value.

Performance Review

Since taking over, Feingold’s constrained approach has enabled him to lower the fund’s beta and standard deviation while turning in a performance that has beaten the large-growth category averages. The generally rising market during his tenure has enabled Feingold’s investment style to thrive. The fund has benefited from its positions in financial giants J.P. Morgan Chase (JPM) and Bank of America (BAC) as well as its stake in Capital One Financial (COF). Rising rates will help these holdings continue to perform well. Top 10 holdings LyondellBasell (LYB) and CF Industries (CF), another material sector holding, also had a positive impact on performance.

Fees, Expenses and Distributions

The fund’s expense ratio of 0.68 percent can fluctuate due to performance-fee adjustments. The fee adjusts based on performance, but can only rise or fall by a maximum of 0.20 percent over the calculation period, which is 36 months. Due to poor performance in the past, the fee is toward the lower end of its historical range, but it has begun to inch upward due to its performance over the most recent 3-year period. This no-load fund does not have 12b-1 fees. There is an initial investment minimum of $2,500. The fund has a trailing 12-month yield of 0.69 percent.

Outlook

Although it is reasonably priced compared to other no-load large-cap funds, FMAGX may not be a bargain in the future if performance continues to beat the market, but that’s a good problem to have. The main issue for investors is whether the encouraging recent performance is sustainable over the long term. The top holdings are consistent with the fund’s stated large-cap growth goals as well as its commitment to reduced volatility. While the fund appears to be headed in the right direction, many analysts still give FMAGX a neutral rating. The time to dive into FMAGX may not be here yet, but the fund has changed course and is worth a look when considering large-cap options. The current sector exposure, for example, has the fund well positioned for current market conditions.

Dividend ETFs can serve as core holdings in well-balanced portfolios and as income-producing holdings for more conservative investors. These funds are typically less volatile because they contain established, profitable companies that are less volatile than those stocks generally contained in growth funds.

The best core holdings for investors with at least 5 to 10 years to go before collecting income are those that focus on growth, such as Vanguard Dividend Appreciation (VIG). Those funds have historically paid lower yields than the broader market or other dividend funds, but grow their payments at a more rapid pace.

At the other end of the spectrum are high-yielding funds such as iShares Select Dividend (DVY), which rely on slower-growing utilities or telecom sectors to deliver a high yield. These funds offer high current income, but investors may be receiving a substantially similar payment 5 years from now, making these funds unattractive for those seeking rising income.

This month we’ll look at a fund that straddles these two markets, with a portfolio that lookssimilar to VIG, but has a yield almost 0.80 percentage points higher: Schwab US Dividend Equity (SCHD).

Investment Strategy

Featuring a three-star rating from Morningstar, SCHD invests at least 90 percent of assets in stocks contained within the Dow Jones US Dividend 100 Index, the underlying benchmark. The ETF endeavors, before fees and expenses, to track the returns of the index as closely as possible. The index is composed of high-dividend-yielding domestic stocks, that have shown a consistent history of paying dividends and have stronger finances than do similar stocks. The index also requires a float-adjusted market cap of at least $500 million and a 3-month average daily trading volume of $2 million. Stocks are ranked by several factors, such as return on equity, dividend yield and dividend growth rate. The index is rebalanced quarterly.

SCHD is a suitable core holding for investors looking for higher yields without the added risk and volatility that are often associated with dividend ETFs that buy beaten-down stocks or are overweight utilities and telecom. Companies that have paid dividends for at least 10 years, provide a high return on equity and deliver strong dividend growth are favored. Firms must also have competitive yields and wide Economic Moat Ratings from Morningstar. The selected holdings are market capitalization weighted, and the result is a portfolio composed of growing, quality large-cap companies. While the tilt toward larger companies with stronger growth potential often results in a lower overall yield, the 3.30 percent yield of SCHD exceeds that of the underlying index, which pays 2.70 percent.

Although SCHD has a yield similar to that of other broad funds, it shies away from the utility and telecom companies that tend to dominate dividend ETFs. Instead, SCHD has a higher concentration of consumer staples. As consumer staples is the largest sector within the portfolio, SCHD tends to out- or underperform the market based on how well this particular sector is doing. Investors already overweight consumer staples should consider another dividend fund, or consider reducing consumer staples exposure elsewhere.

Portfolio Composition and Holdings

With $2.5 billion in assets, SCHD is allocated 100 percent in domestic stocks. The portfolio has a 69 percent exposure to giant-cap companies. The fund also has a 23 percent, 7 percent and 1 percent exposure to large-, mid- and small-cap issues, respectively. The portfolio features a price-to-book ratio of 3.0 and a P/E ratio of 16.9. The average market cap weighting is $97 billion compared with the $52 billion of the Russell 1000 Value Index.

The portfolio is overweight the consumer staples, industrial and technology sectors while being underweight financials, telecoms and utilities. The relative absence of telecoms and utilities makes SCHD perform closer to a typical broad market index fund. The lack of exposure to the financial sector is a significant drawback.

The top 10 holdings in SCHD constitute 42 percent of assets. These holdings in descending order are Exxon Mobil (XOM), Microsoft (MSFT), Procter & Gamble (PG), Johnson & Johnson (JNJ), Pfizer (PFE), Verizon (VZ), Chevron (CVX), Coca-Cola (KO), Home Depot (HD) and Intel (INTC).

Historical Performance and Risk

In addition to an average Morningstar return rating, SCHD has delivered 1- and 3-year returns of 4.86 percent and 12.69 percent, respectively. These compare to the category averages over the same periods of 5.71 and 12.69 percent. While its benchmark index compared favorably to the broader S&P 500 during the financial crisis, the fund’s recent performance relative to the index has been less compelling. Over the past 3 years, SCHD has had a downside capture ratio of 99.45. This is worse than the large value category average of 94.17. The ETF is still able to garner a below-average risk rating from Morningstar due to its 0.91 beta and 9.64 standard deviation, which are both less than the category averages of 0.95 and 10.03, respectively.

Fees, Expenses and Distributions

The fund has a 0.07 percent expense ratio, making it one of the least expensive dividend-paying ETFs available. One drawback is the fact that the fund lagged the underlying benchmark by more than the expense ratio over the past 1- and 3-year periods. This may indicate higher implementation costs for the ETF that began trading in October 2011, something we have seen with new ETFs.

Outlook

Investors looking for growth should stick with dividend growth funds such as VIG, but those wanting to avoid utilities and telecom can still get a solid yield considering SCHD. The one drawback is the fund’s limited financial exposure, but that can be rectified with a financial sector ETF. Financial stocks haven’t outperformed over the past 10 years and have been kept out of the index due to slashed dividends in 2008; however, balance sheets are strengthening as banks regain profitability. Regulators may relax the rules put in place after 2008 that restrict banks to lower dividend payout ratios. We don’t know if or when those rules will be softened, but if they are, financials will likely be some of the fastest dividend growers in the market and should be a consideration when evaluating SCHD. The abundance of consumer staples presents the opposite issue; high concentration in the sector may require some lightening of separate consumer staples holdings. While we like the low cost of the fund, VIG remains our preferred holding, despite the slightly lower yield.

The wide variety of options for growth-minded investors can be daunting; less flashy funds tend to be overlooked. Individuals looking for an actively managed growth fund that invests in mid- and large-capitalization companies should consider the four-star Morningstar rated Vanguard Morgan Growth Fund (VMRGX). We like this underappreciated choice, which offers a unique blend of sector and growth exposure where many comparable funds fall short.

Growth funds offer opportunities for capital appreciation that increase the value of both the fund and individual portfolios. They also provide exposure to a broad range of stocks, which helps to reduce volatility and risk. Professional portfolio managers and their supporting analysts have the ability to scan the entire investment horizon and identify stocks with the best growth potential that also fit the investment strategy of the fund, a process that can be difficult for individual investors. A growth fund creates a passive way to invest in a diversified grouping of stocks poised for capital appreciation.

Mutual Fund Profile

The highly diversified $10.88 billion Vanguard Morgan Growth Fund invests at least 80 percent of assets in domestic large- and mid-cap stocks that managers believe are poised to generate faster-than-average earnings and revenue growth. This large-growth category fund may also invest in preferred shares, convertible securities and warrants. Up to 25 percent of assets may be invested in foreign stocks. VMRGX employs an active strategy that incorporates the distinctive investment approaches of five sub-advisors. The fund’s mid-cap holdings potentially increase volatility more than if the fund were concentrated strictly on large-cap shares. This no-load, non-diversified mutual fund has an initial investment minimum of $3,000.

Investment Strategy

The fund’s sub-managers utilize traditional, fundamental bottom-up research approaches and one quantitative analysis approach to stock selection. In addition to capitalizing on multiple individuals’ strengths, the multimanager structure ensures broader diversification while reducing potential volatility. The managers include:

Jim Stetler, pincipal of Vanguard, aims to outperform the MSCI U.S. Prime Market Growth Index by using a multifactor computer stock-picking model.

Paul Marrkand, Senior Managing Director and Equity Portfolio Manager at Wellington Management, oversees the largest tranche of VMRGX. His primary focus is on large-cap stocks whose price he believes does not reflect the companies’ competitive advantages and earnings potential. As we have mentioned in previous newsletters, he is a fantastic manager.

Kathleen McCarragher, Managing Director and Head of Growth Equity at Jennison, concentrates on large-cap companies that are growing revenues faster than the S&P 500.

Ford Draper, President, Chief Investment Officer and founder of Kalmar, as well as Stephen Knightly, CFA, President of Frontier Capital, concentrate on smaller stocks, utilizing many of the same analytical tools as their fellow managers while also taking into consideration such factors as growth, value and earnings momentum.

Portfolio Composition and Holdings

The portfolio is spread across 348 individual stocks (as of June 30). Apple (AAPL) comprises 5.4 percent of the fund, more than double the allocation to the second holding, Google (GOOG). This makes for a relatively diversified fund with less than 20 percent of total assets in the top 10 holdings. Other major holdings include Gilead Sciences (GILD), Amazon (AMZN), Facebook (FB), Oracle (ORCL), Microsoft (MSFT), Biogen (BIIB), Home Depot (HD) and Bristol-Myers Squibb (BMY). Other significant holdings generate a solid exposure to biotechnology, including Amgen (AMGN), Allergen (AGN), Celgene (CELG) and BioMarin (BMRN).

The fund has a 93 percent allocation to domestic shares and a 5 percent exposure to non-U.S. securities, primarily from Developed Europe. VMRGX has an average market cap of slightly more than $44 billion, which is $10 billion less than the benchmark Russell 3000 Index due to its small- and mid-cap exposure. The portfolio has 41 percent exposure to giant-cap funds as well as 33 percent allocation of large-cap shares, though the fund also has 24 percent and 2 percent exposure to mid- and small-cap shares, respectively. These allocations are roughly in line with the benchmark index, but the fund is about 6 percent underweight giant-caps, with that exposure shifted mainly to mid-caps and some in small-caps. The portfolio has a price-to-book of 4.12 and a P/E ratio of 22.02 as of June 30.

Historical Performance and Risk

VMRGX is overweight healthcare, consumer discretionary and technology, which are three of the four top-performing sectors in 2015. It is underweight energy and materials, two of the worst-performing sectors this year. The Vanguard Morgan Growth Fund has an above-average return rating from Morningstar.

	1-year	3-year	5-year	10-year
VMRGX	9.18	15.12	14.11	8.09
Category Average	5.88	13.77	13.18	7.67

 

VMRGX has increased risk due to its heavy concentration in three sectors (about 75 percent of assets as of August 31), but that concentration has paid off in 2015. Although shares underperformed the S&P 500 Index in late September and early October due to weakness in healthcare, year-to-date through September 30 VMRGX was down 0.20 percent versus a 5.29 percent drop in the S&P 500.

The fund has managed long-term risk well, with an average risk rating from Morningstar as well as a 3-year beta and a standard deviation of 1.02 and 10.34, respectively. These compare to the category beta and standard deviations of 1.02 and 11.01.

Fees, Expenses and Distributions

VMRGX has an expense ratio of 0.40 percent. This is significantly less than the category average of 1.18 percent. The fund does not have a 12b-1 fee. On December 17, 2014, the fund had a short- and long-term capital gain distribution as well as a dividend payment totaling $3.016 per share with a reinvestment price of $24.86. Investors may want to consider holding this fund in a tax-efficient account.

Outlook

Depending on how investors view the risk/reward opportunities in the healthcare, consumer discretionary and technology sectors, VMRGX may be a good option that reduces portfolio exposure to commodity sectors. VMRGX typically beats the performance of more than 70 percent of its category peers. The fund also benefits from Vanguard’s economies of scale, which produce lower-than-average fees and expenses for an actively managed fund. Vanguard Morgan Growth Fund may be a suitable portfolio addition for investors with a moderate risk tolerance and a long-term investment horizon. Currently, we rank the fund as a Strong Buy with a ranking of 88.