Despite factors that might otherwise suggest a good year for stock pickers, the early returns are not encouraging.
Through the first two months of 2016, just 28 percent of large-cap mutual fund managers are beating their benchmarks, according to a Goldman Sachs analysis. Worse yet, only 1 percent are showing a profit in what has been a tough year for the market.
With volatility and a breakdown in correlation expected, many on Wall Street anticipated this would be a good year for active management. However, 2016 is looking a lot like 2015, when only about 27 percent of active managers outperformed.
"Despite the greater alpha return opportunities that come with higher dispersion, the market environment has been challenging for investors," Goldman strategist David Kostin wrote in a report.
"Dispersion" is the investing term for performance difference between sectors. Low dispersion rates make it difficult to find mispricing opportunities and favor passive management, or investing in funds that track various market indexes. In 2016, the worst-performing sector has been financials, with an 11.4 percent decline, while the best of the 10 broad groupings has been telecom, with a gain just shy of 3 percent as of Monday trading.
What's also hurt active management has been the underperformance of momentum stocks, particularly the FANGs — Facebook, Apple, Netflix and Google (the predecessor of Alphabet). As a group, the tech darlings returned 83 percent in 2015; this year, the result has been a 10 percent fall.
Finally, investors have been hurt by the general lagging performance of growth stocks, which are more heavily concentrated in portfiolios. The S&P 500 growth index is down 5.3 percent year to date, while the value index is off about 4.1 percent. The growth index rose 3.6 percent in 2015, easily outperforming the broader market, while value fell 5.6 percent.
"The transition from Growth to Value is unusual given the increasing market focus on the possibility of a U.S. economic recession," Kostin wrote. "Although our economists believe U.S. recession risk remains low, most client conversations this year have started with the topic, and asset markets seem to be pricing in a more pessimistic outcome than our forecast."
All of it could be due to the violent gyrations in energy stocks, which were at the bottom of the S&P 500 in 2015 and faring only slightly better this year. Energy pressures on the market that are also stocking recession fears have caused portfolio managers to cut back on risk.
"The de-risking has weighed on high-growth stocks that comprise many of the most popular positions," Kostin said.
The underperformance of mutual funds, couple with their comparatively high cost to index funds, has sent many investors to exchange-traded funds. Long-only equity mutual funds have seen $38.1 billion in outflows for 2016, while ETFs have lost $17.6 billion, according to Bank of America Merrill Lynch.
The ETF redemptions, however, make up a greater percentage of total assets in the $2 trillion industry, compared to the $5.6 trillion under management in U.S. equity-based mutual funds, according to the Investment Company Institute.