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In Trade War, Active Managers Would Fare Better Than Passive Peers

Large-cap funds are less exposed to stocks hurt by higher import costs, Bank of America research shows.

  • By Christine Idzelis

Active fund managers are better positioned for a U.S. trade war than the Standard & Poor's 500 index, according to a new research report from Bank of America Corp. 

Large-cap funds were 21.1 percent exposed to stocks hurt by higher import costs based on their actively managed holdings in February, Bank of America Merrill Lynch said in the report, dated March 29. That compares with a 23.5 percent exposure for the S&P 500.

Trade tensions between the U.S. and China have been escalating since President Donald Trump's decision last month to impose tariffs on imported steel and aluminum. China on Sunday retaliated with duties on 128 American goods and commodities, including pork and fruit.

"Although active funds' foreign exposure is roughly in-line with the S&P 500 benchmark, they do have significantly lower exposure to the stocks that appear more vulnerable to a potential trade war, particularly one with China," Bank of America Merrill Lynch strategists said in the report. 

The S&P 500 had 18.2 percent exposure to China in February, compared with 15.8 percent for actively managed large-cap funds, the report shows.

While actively managed funds were generally in line with their benchmarks in terms of their exposure to foreign stocks — ranging from 29 percent to 31 percent depending on the category —  value managers were slightly underweight, according to Bank of America Merrill Lynch. Value fund managers had 26 percent foreign exposure, compared with 28 percent for the Russell 1000 Value Index, the report shows. 

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Active managers have faced stiff competition from passive index funds, which investors have embraced for their cheaper fees and outperformance during the nine-year bull market.

Markets have become more volatile this year, with the S&P 500 down 1.2 percent through March 29. The index continued to slide Monday, down 3 percent at around 1:55 p.m., to 2562.

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