Most quantitative mutual funds are failing to beat benchmarks as U.S. stocks are on track for their best annual performance since 2013, according to research from Bank of America Corp.
Large-cap quant funds lagged the Russell 1000 index by an average 3.2 percentage points this year through November, Bank of America equity and quant strategists said in a research report this month. Only 11 percent of quant funds performed better than the benchmark.
Quant funds, which use computers for stock picking, are struggling to outperform this year, a situation shared with actively managed mutual funds investing in U.S. companies, according to the report. It’s been a great year for the stock market, with the Standard & Poor’s 500 stock index on its way to the best performance since 2013 following a 27.6 percent gain through November.
The Russell 1000 index, meanwhile, gained 27.7 percent during the first 11 months of this year, exceeding returns of 24.5 percent for large-cap quant funds and 26.3 percent for large-cap actively managed funds, the report shows.
While small-cap funds quant funds also underperformed their benchmark during this year through November, the average small-cap manager succeeded in beating it, according to the Bank of America strategists.
Their research shows the average small-cap quant fund returned 20.2 percent over that period, lagging the 22 percent gain posted by the Russell 2000. The average small-cap manager posted a 22.7 percent return this year through November.
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Bank of America quant strategists said in an October report that the markets were in the “trickiest part of the cycle,” where the winning streak of “growth” and “quality” factors may be nearing an end. They said at the time that investors should tilt their portfolios toward “value.”
In this month’s research report, Bank of America strategist said that “value” was the best-performing factor group in November, gaining 4.7 percent. Still, the Russell 1000 Value index underperformed the Growth index by 1.3 percentage points, they said in the report, “suggesting that the differentiated performance resided at the tails of ‘value’ versus ‘growth.’”