Goldman Says Large-Cap Mutual Funds Are Losing Badly to Benchmarks

(Bloomberg) -- Goldman Sachs Group Inc. says the allure of mutual funds is fading as the year draws to close.

The percentage of large-cap mutual funds outperforming benchmarks has nearly halved to 33 percent from 63 percent in April. That’s been fueled by sector allocation, where overweights in cyclical groups like financials have hurt returns all year, and underweights in defensive shares have hurt during the recent market downturn.

“Although mutual fund overweights have provided some support to fund returns year-to-date, the most underweight mutual fund stocks have outpaced the most overweight positions” in the fourth quarter, Goldman strategists led by Arjun Menon and David Kostin wrote in a note published late Wednesday.

Not all investors are dissuaded. Active mutual funds are on pace to see their lowest outflows since 2014 and those will likely drop again in 2019, while flows to passive may be lowest in three years, the report said. In fact, demand for active management should continue to increase in 2019 given Goldman’s forecast of elevated risk and a “non-trivial” 30 percent probability of a decline of 10 percent or more in equity prices if the market begins to price in a recession, the strategists wrote.

“In an uncertain and volatile environment, the ability of active managers to reduce risk better positions them to outperform the market relative to index-tracking passive funds,” the strategists wrote. However, since Goldman’s economists don’t expect a recession in 2019, “the overall trend of passive inflows and active outflows should persist.”

Average allocation to the technology sector is at a five-year low after funds cut their relative weightings for the eighth time in the past nine quarters, the report said. Funds boosted exposure to health care and financials. Relative allocation to utilities and real estate is at five-year highs, though funds still remain underweight those groups.

Constituents with the largest overweights by mutual funds include Visa Inc., Adobe Inc., Salesforce.com Inc. and Mastercard Inc., while most underweighted stocks include Apple Inc., Exxon Mobil Corp., Berkshire Hathaway Inc. and Amazon.com Inc., the report said.

To contact the reporter on this story: Joanna Ossinger in New York at jossinger@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Dave Liedtka, Andrew Dunn

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