Active Manager Darts Hit Target in Decade’s Easiest Stock Market
(Bloomberg) -- After a decade of futility, active mutual fund managers are having the run of a lifetime in 2021’s can’t-miss stock market.
With leadership in equities moving beyond megacap tech companies -- for once -- stock pickers are finding a reprieve from the dominance of their index-tracking rivals. Selective bets on undervalued stocks are paying off as unloved value and cyclical strategies fall into favor.
The first quarter saw 58% of large-cap active funds outperform their Russell 1000 benchmarks, compared with the 44% historical average, Bank of America analysts wrote in a recent note. For core funds, which blend growth and value, 62% outperformed, the most in the first quarter since 2001 and the third-best since 1991, thanks in part to overweight positions in industrials, financials and materials.
While proponents of active management may want to credit the big quarter to nimble stock picking, the performance is more accurately ascribed to the market backdrop. The first three months of 2021 have served up an especially rich landscape for anyone trying to beat a market-weighted benchmark, with equal-weighted indexes far surpassing their standard counterparts.
“We’re in what used to be called a stock-pickers’ market,” Liz Ann Sonders, chief investment strategist at Charles Schwab, said by phone. “The playing field has gotten more leveled for active investors or active fund managers -- maybe not to be able to outperform passive but a more-level playing field.”
Those managers pursuing midcap and large-cap strategies have done particularly well, according to Jefferies’ analysts Steven DeSanctis and Eric Lockenvitz, with 56% of large-cap growth managers beating their benchmarks, helped by big tech names taking a step back while more reasonably priced growth stocks thrived.
“For five-to-10 years, it was hard to outperform if you didn’t own big positions in the megacap tech names,” said Ross Mayfield, investment strategy analyst at Baird. “Now, with the completely changed economic outlook, not only has value come back into favor, but there’s more dispersion among individual names, so it’s not just the big tech stocks dragging the market higher.”
An equal-weight version of the S&P 500, where megacap hegemony is reduced, is having its best year relative to the classic market-cap weighted S&P 500 in more than a decade, besting it by more than 4 percentage points. A similar dynamic is playing out in the small-cap universe where an equal-weight index of tinier companies is besting the Russell 2000 by nearly 6 percentage points this year.
Implied correlation for U.S. equities has also declined, with individual stocks moving independently to one another as of late. A gauge of projected correlation in S&P 500 stocks in the next month fell to 0.22, down from the 0.70 reading clocked ahead of the November elections. A reading of 1 means securities are moving in lockstep.
“There were a few months there where if you bought a technology stock, you were pretty sure it was going higher -- and in most cases it did. Now you have to be a bit more selective, not only on your sector but even within technology,” said JJ Kinahan, chief market strategist at TD Ameritrade. “This is the time for the first time in a while where we’re seeing technology hit the brakes a little bit. And so with that, some of the value stocks are coming into play.”
Actively managed exchange-traded funds are also attracting loads of cash, taking in more than $32 billion during the first quarter. That’s by far the best on record and up from only $3 billion during the same period last year, according to data compiled by Bloomberg.
The success of Cathie Wood at Ark Investment Management is drawing attention to the category, which combines the low cost and tax advantages of the ETF wrapper with the benefits of stock picking. Her funds have taken in almost $18 billion in the first three months of 2021 alone, despite a recent slate of underperformance as Wood’s growth strategies faltered amid the spike in Treasury yields.
“Active mangers could very easily continue to benefit from the reflation and could very much benefit from rotations that are taking place inside the market if they’re positioned properly,” said Scott Knapp, chief market strategist at CUNA Mutual Group. “But I think the part of the active management story that was driven by theme-based investing -- some of these speculative, momentum stories -- is likely going to be fleeting especially if we see meaningful increases in interest rates.”
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