Christine Benz: Hi, I'm Christine Benz from Morningstar. The first half featured extreme market volatility, as well as extremely varied performance for mutual funds. Joining me to provide a recap of the first half in mutual funds is Russ Kinnel. He's Morningstar's director of manager research. Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's just talk about performance in the first half. It sounds like we just continue to see kind of more of the same, where we have very strong performance among large-growth names, as well as weak performance among small-value. Let's talk about how stark the differential has been.

Kinnel: Yeah, it's kind of an amazing year because we had a rally end of February, large growth beat small value. We had a massive sell-off late February to late March, growth beat value. And then a big recovery, and growth beats value. So, put it all together and large growth is up about 6 per cent for the first half, small value down about 24 per cent. So, really just a record gap between large growth and small value. The rest of the style box somewhere in between there. Growth better than value, large better than small.

Benz: Let's drill into the reasons for that performance gulf. I think most investors know well some of the large-growth stocks that have really been pacing that portion of the market, but what's going on in small value and in that whole value column of the style box overall? What's holding that area back?

Kinnel: Well, one way to look at it is small value has a lot of economically sensitive companies. So, when you have this economic shock where things are going really strong or almost what might be considered full employment, and then veer sell-off, all of a sudden all these small-value companies were hit. So, you think about energy companies, financials, travel stocks, a lot of restaurant stocks, retailers. A lot of small value names were hit really hard, and we've seen bankruptcies, and most of the bankruptcies are in small- and mid-value companies.

Benz: When you look at fund performance, let's talk about some of the value funds that we like, that your team likes, that have really struggled in this environment.

Kinnel: Yeah, among the perennial favorites, Oakmark really stands out. Both their domestic and their foreign funds have been hit very hard. The domestic have a bit of an energy tilt, the foreign had a little too much in financials, and neither one had much in health and tech. Put all that together and they've had a very hard first half.

Benz: And I understand some deep-value funds have struggled, as well.

Kinnel: That's right. Hotchkis & Wiley has done particularly poorly across the board. A lot of their funds came into the year overweight energy, and the funds have just really been crushed and they're getting a lot of outflows. Longleaf Partners, maybe not quite as deep-value as Hotchkis, but a lot of deep-value kind of names. And they've also had a very difficult year.

Benz: And you note that some of the Primecap funds have also struggled. Investors know them to be somewhat growth-oriented. So, I guess that's a good indication that not all growth funds have thrived.

Kinnel: That's right. In relative terms, the Primecap funds have done really poorly. As you know, they have a lot of healthcare and some tech. So those are good things, but they have a surprisingly large amount of travel-related stocks for a large-growth shop. So, this has been a very hard year for them. They're in the bottom decile in all their funds. Obviously the long-term results are still great, but it shows that even the best funds, I think, can be flat-footed by a market like this.

Benz: Moving over to the happy side of the ledger, funds that have done really well during this period. Let's talk about some of those.

Kinnel: In absolute return terms, Alger Small Cap Focus and Morgan Stanley Institutional Growth, those are funds that are very heavily tech and healthcare. Morgan Stanley particularly likes a lot of the big Internet names. So, those have done particularly well. In relative performance terms, a couple good value funds, FPA International Value because it's got a lot in cash. Royce Special, which we've talked about over the years many times, is a longtime favorite. It's a very defensive fund with, Charlie Dreifus emphasises, clean balance sheets and other characteristics. So, sure enough, it's lost much less than its small-value peers this year.

Benz: How about fund flows, Russ? It seems like we've just been seeing this avalanche of outflows from active funds. My guess is that that is not getting any better here in 2020, but can you kind of summarise some of the trends that you've been seeing on the fund flows front?

Kinnel: It's really been an interesting, very fluid situation. In March, we actually had more money going out of bond funds than stock funds. And, of course, a lot of that sell-off came late in the month, so that may be why. But then in May we saw accelerating outflows from equities and inflows into fixed income. In fact, May was the worst month for equity flows since 2009. So, it's really hard to say where we go from here. Because, of course, the markets have rebounded some, but as we mentioned, value's still hit pretty hard. So, obviously if we have sustained outflows, that could be pretty tough for a lot of active equity.

Benz: Russ, always great to see you. Thank you so much for providing your insights today.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.