Active Funds Deliver Alpha in ‘Paradise’ for Stock Picking

The outperformance came amid one of the strongest rotations ever into value stocks, according to Bank of America.

Illustration by II

Illustration by II

It’s been an unusually good time for stock pickers.

Seventy percent of actively managed U.S. mutual funds that buy the stocks of large companies beat their Russell 1000 benchmarks last month — their highest hit rate since 2007, according to a Bank of America research report Tuesday. The average large-cap fund outperformed by 85 basis points to deliver the most alpha since 2009, when the global financial crisis had wreaked havoc on markets.

The gains came amid one of the strongest rotations ever into value stocks, which may keep up their streak winning after outperforming growth equities last month, according to Bank of America. That’s partly because valuation dispersion within the Standard & Poor’s 500 index remains elevated at 45 percent above the long-term median — not far from the financial crisis peak.

“Wide dispersion, nascent signs of re-positioning, and still extreme valuations would argue for more room to run as the recovery remains intact,” Bank of America’s quant and equity strategists said in the report. “Moreover, the fact that only slightly over 50 percent of core and value managers outperformed indicates that value tilts are not particularly aggressive.”

Over the past few months, investors have begun to shift into value and cyclical equities, according to Bank of America. In November, Research Affiliates founder Rob Arnott suggested a recovery in value stocks was finally beginning after years of underperformance.

[II Deep: Rob Arnott Sees Value Recovery Taking Root After Worst Meltdown Since 1931]

Quantitative funds, which tend to tilt toward value, also had a strong February, with 72 percent of them beating benchmarks this year, Bank of America’s strategists said in their research note. They said last month’s “paradise” for stock pickers was particularly evident with growth funds.

Ninety-five percent of managers outperformed the growth index for their best month since 1991, the bank’s research shows. But the “top-heavy” benchmark was easier to beat as almost 60 percent of stocks in the index outperformed even as the five biggest – Apple, Microsoft Corp.,, Facebook, and Tesla — fell 5.3 percent on average, the strategists said.