Failing to Measure Up Is $422 Billion Stock Pickers' Crisis

(Bloomberg) -- You don’t have to look far to explain why investors are yanking money from mutual funds run by stock pickers.

Only 9.5 percent of actively managed large-cap domestic equity funds beat the S&P 500 Index in the five years ended Aug. 31. That’s the worst five-year performance since 1999, according to data from Morningstar Inc.

Investors are paying attention. About 3,000 actively run funds in that category saw redemptions of $422 billion over five years, while passive vehicles attracted $480 billion.

Theories abound as to why the stock pickers have fared so poorly. Some blame the cheap money policies of central bankers for distorting fundamentals. Others note that markets seem to be driven by macro factors -- the direction of rates, the rise and fall of energy prices, worries about global growth -- rather than the earnings of individual companies.

“Most active managers focus on companies, not macroeconomics,” said Michael Rosen, chief investment officer at Angeles Investment Advisors in Los Angeles, where he helps oversee $30 billion. “There has not been a lot of reward for making distinctions among stocks.”

A report issued Thursday by S&P Dow Jones Indices painted an equally gloomy picture of the performance of active managers.

‘Appalling’

In the year ended June 30, 85 percent of large-cap stock funds, 88 percent of mid-cap funds and 89 percent of small-cap funds failed to match the major stock indexes they track: S&P 500 Index, the S&P Midcap 400 Index and the S&P Smallcap 600 Index. The numbers for five and 10 years were slightly worse.

“The numbers are pretty appalling,” said Aye Soe, senior director of global research at the S&P unit that compiled the report. “Given the choppiness in the markets we would have expected the active managers to come out looking better.”

Mutual funds with an international tilt fared somewhat better. Over the past year, 75 percent of global funds, 55 percent of international funds and 42 percent of emerging market funds failed to match indexes. Over 10 years roughly 80 percent of the funds trailed indexes.

Active managers may take comfort by looking at the past. The last time they trailed indexes this badly was in the late 1990s. In 1998 and 1999, according to Morningstar numbers, fewer than 8 percent of large-cap domestic stock funds beat the S&P 500 over the trailing five years. When the tech bubble burst in 2000, stock pickers began to do better. By 2003, roughly half were beating the index over five years.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net, Alan Mirabella, Josh Friedman