Career risk flashing in fund land as only 29% beat benchmarks
While stocks march to new highs, professional money managers are not celebrating. Instead, they’re losing sleep over their performance.
Fewer and fewer have an edge on the market this year. As of the end of October, only 29% of large-cap actively managed mutual funds were beating benchmarks, data compiled by Bank of America showed. That’s a deterioration from 41% in the first half.
A lot of it comes down to one stock, Apple, whose 2019 returns almost tripled that of the S&P 500. The rest is attributable to a persistently cautious stance after the near-death experience in late 2018. Money managers who have flocked to safety in utilities and dividend stocks saw the pain compounded by the latest risk-on rally. Over the past three months, banks and industrial shares have staged a comeback, dealing a blow to those that have shunned high-beta shares amid recession fears.
“Many missed the cyclical turn and have stayed too long in the global-recession/low-rates-for-longer/anti-China trade,” Chris Harvey, Wells Fargo’s head of equity strategy, wrote in a note to clients. “The underperformance caused by this positioning is taking a toll. In our view the end result is not a beta chase into year-end, but liquidations.”
Funds that invest in stocks seen as having the best growth potential are the worst performing style group this year, lagging behind the Russell 1000 growth index by 2.7 percentage points, according to BofA. Their aversion to Apple in particular hurt returns last month, accounting for almost all their underperformance.
Below are more details on fund performance, based on BofA data.
- Value funds, which invest in shares traded at a cheaper multiple relative to profits or book value, were the only style group that posted an over 50% hit rate in October
- Quant funds continued to lag in October, with 38% beating the Russell 1000. Only 11% of quant funds are ahead of their benchmark this year
- Small-cap funds posted the worst month since June 2017 in October, with only 20% of managers beating the Russell 2000 benchmarks. For the year, however, their hit rate of 52% is still better than their larger counterparts