Active management is dead. Long live active management!
More than 52 percent of large-cap mutual funds have beaten their benchmarks for the year-to-date, on track for the highest rate of outperformance since 2009, according to a recent report by Goldman Sachs on the state of the mutual fund market. Given the battering that the active fund management sector has taken, both from a returns perspective and with assets flowing into low-fee passive funds and ETFs, this is some rare good news for stock-pickers. The picture is not universally positive, however.
Only 37 percent of large-cap core funds have beaten their benchmark, compared with more than 60 percent for growth and value mangers. The reason: Many core fund managers have been avoiding information technology stocks, the best-performing sector this year.
Since the start of 2017, according to Goldman Sachs, large-cap core funds have changed their views of this sector and have gone from being 31 basis points overweight (or 0.31 percent) to 13 basis points underweight. This change in strategy has proven to be costly.
Core mangers were underweight all but two of the top ten-performing companies in the Standard & Poors 500 stock index year-to-date and were neutral on another. Both core and growth mangers were underweight Apple, which has been the top-performing stock in the index year-to-date and is up 33 percent on the year. Core mangers are, on average, 73 basis points underweight Apple, while growth managers like the personal computing giant even less and are 253 basis points underweight. Core managers, however, also were underweight Facebook and Microsoft. Among the top S&P performers, core mangers were only overweight Google parent Alphabet and Visa; they were neutral on the tobacco stock Philip Morris International. Overall, core managers were 13 basis points underweight information technology, with growth managers overweight the sector by 422 basis points and value mangers by 277 basis points, versus their respective benchmarks.
Another sector where value, active, and core managers are in strong disagreement is energy. Year-to-date, core managers are underweight the sector by an average of 74 basis points, value mangers have underweight it by 29 basis points, and growth managers have been overweight by 133 basis points. Energy has been among the worst-performing sectors in the S&P 500 this year, second only to telecommunications. Yet eschewing energy was not enough for core managers to undo the damage of bailing out on a still-raging market for tech stocks.