Active managers do better in a volatile stock market, but investors still prefer passive

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Actively managed funds remain sharply out of favor in 2018, as investors continue their decadelong move to low-fee passive products, but for the moment, that exodus is occurring against a backdrop of stronger-than-usual performance.

According to data from Goldman Sachs, 56% of large-cap mutual funds have outperformed their benchmark so far this year, putting them on track for their best year of relative performance since 2007, and extending a recent period of modest outperformance. Over a 10-year period, only 38% of managers outperformed, according to Goldman.

Courtesy Goldman Sachs


The investment bank credited strong positioning for the outperformance, including the funds going overweight on technology and consumer discretionary sectors (an industry led by Amazon












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and Netflix












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), as well as increased exposure to energy stocks at a time when the group was ready to take off. These have been some of the strongest areas of the market in 2018.

“Most sector exposures have benefited fund returns relative to their benchmarks. The performance of the highest conviction stock positions (overweights and underweights) has also driven above-average outperformance since January,” Goldman wrote. “Apart from positioning, the macro landscape has been favorable for fund outperformance given low equity market returns and modestly higher dispersion.”

The improved performance also came amid a backdrop of heightened stock-market volatility, which offered more opportunities for stock pickers to seek bargains and avoid names with greater risks. According to Morningstar, more active managers beat their passive counterparts in the U.S. stock correction that started in February, when the Dow Jones Industrial Average and the S&P 500 swiftly tumbled 10% on inflation concerns.

In an actively managed fund, the holdings are selected at the discretion of a manager or team. This is in contrast to passive funds, which mimic the performance of an underlying index by holding the same components it does, and in the same proportion. Investors have flocked to passive funds over the past several years, gravitating toward their low fees and typically stronger performance. While performance stats are volatile and can result in short-term periods of better results, as has been seen in 2018, data have repeatedly shown that few active funds can boast better performance than the market over the long term.

Passive strategies have also gotten a boost from a bull market in its ninth year that started in the wake of the financial crisis. Stocks rose broadly in the rally, creating what was sometimes referred to as a “rising tide” market where basically all sectors and securities benefited. Active funds are seen as having a harder time beating a market that is already performing well.

According to Morningstar’s “Active/Passive Barometer,” 43% of managers across its nine equity segments (for large, mid, and small-cap stocks, and value, growth, and blend strategies) beat their benchmark in 2017. That represented improvement from 2016, when only 26% did.

Despite the improved performance statistics, investors continue to favor passive funds. According to data from Morningstar Direct, passive U.S. stock funds have seen inflows of $61.5 billion over the past 12 months. Active funds have seen outflows of $202.6 billion over the same period.



Source : MTV