Core Funds Are ‘Shifting Over’

Director, Asset Allocation
10/25/2019

Grant me the use of a baseball strategy analogy for a phenomenon that we are witnessing in the fund management industry.

In figure 1, I added blue arrows and little red dots to show how to shift the team’s positioning for a batter who typically hits toward third base. In baseball, this is sometimes called “shifting over.”

Figure 1: “Shifting Over”
Figure 1_Shifting Over

Now imagine a stock market that has not been dominated one way or another by growth or value stocks. This is an example of the style box image for a large cap blend fund you may be considering.

Figure 2: Hypothetical Large Cap Core Fund, Normal Environment

Figure 2_ Hypothetical Large-Cap Core Fund

In figure 2, the yellow dot, representing a hypothetical basket of large cap blend funds, is dead center in the “large cap blend” square, as is the Russell 1000 Index of large cap stocks, as many of us would expect. Because a fund you are considering has a large blend mandate, the blue dot may fall anywhere within that square. I put it a little below the yellow and red dots at random (it could just as easily be above them, to the right, to the left, etc.).

Here’s a concern: In the real world right now, the yellow and red dots aren’t in the center. As we see in the following charts, they are “shifting.”

Figure 3 shows the Morningstar image for the WisdomTree U.S. LargeCap Fund (EPS), which “shifts over” toward the “Value” style box to its left while staying in the center column, “the core.” Now look at the yellow dot for the large cap blend category; it encompasses hundreds of funds that, “on net,” are all the way over on the border wall with “Growth.” In fact, the Russell 1000 Index is doing the same thing.

And this market has melted so high that all three dots are pushing above the nine style box squares, into the gray squares at the top—the “Mega Cap” zone that lies above Large Caps.

Figure 3: Large Cap Core? Try Mega-Cap Closet Growth

Figure 3_Large-Cap Core to Mega Cap

Figure 4 shows one reason money managers can be tempted to drift toward growth: performance chasing.

Figure 4: 5-Year Returns through 9/30/19

Figure 4_5-Year Returns through 9.30.19

For definitions of Indexes in the chart, please visit our glossary.

This is what I get for WisdomTree U.S. MidCap ETF (EZM), which I chose because Morningstar categorizes it as a Mid Cap Blend. One more surge upward in this stock market and the Russell “Mid” Cap could end up in Large Cap territory, while small caps could end up in the Mid Cap boxes.

Figure 5: Russell Midcap Index Is Shifting Upward and Rightward

Figure 5_Russell Midcap Index Is Shifting Upward and Rightward

Small caps can be particularly egregious. The WisdomTree U.S. SmallCap Fund (EES) “shifts toward” pure small company exposure and value. But one may think the Law of Large Numbers, which says that an experiment conducted enough times will converge to the expected value, might put the small cap blend industry as a collective into the center of the blend square. However, in figure 6, the Small Blend category (the yellow dot) has an appearance of Small/Mid (SMID).

Figure 6: Small-Cap Core or ‘SMID’ Growth-Lite?

Figure 6_Small-Cap Core or SMID Growth-Lite

“Shifting over” to growth investing sometimes works fine—like when growth stocks outperform. And, in recent years, they have. But what happens if value investing comes back?

Unless otherwise stated, all data from Morningstar, as of 10/11/19.


Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal.  Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development.  This may result in greater share price volatility.  Please read each Funds' prospectus for specific details regarding the Fund’s risk profile.
About the Contributor
Director, Asset Allocation
Jeff Weniger, CFA serves as Director, Asset Allocation at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.