"The recipe for distress may boil down to a few factors," Savita Subramanian BofAML's equity and quant strategist said in a report for clients. She pointed to high levels of correlation, or the tendency of stocks to move in the same direction at once, which translates into difficulty topping basic market benchmarks.
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"But these contributors to underperformance have been in place for a while — the lit match taken to active returns last quarter was likely the massive reversal — by the market, by sectors, by styles and by stocks, occurring within the quarter," she added.
Additional factors included the beating the momentum stocks have been taking, as well as the general underperformance among the stocks most commonly owned by fund managers.
Taken together, the performance numbers help explain the continued investor preference, at least as far as stocks are concerned, for passive index funds that track indexes but carry lower costs and are more liquid than mostly active mutual funds.
In 2016, investors have pulled $50.2 billion from equity mutual funds while redeeming just $176 million of the corresponding exchange-traded funds, according to BofAML and EPFR Global. Overall, equity mutual funds still have far greater assets — about $1.2 trillion of the total $2 trillion ETF industry vs. $7.6 trillion of the $12.3 trillion (excluding money markets) in mutual fund assets, according to the Investment Company Institute.
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However, unless conditions change, ETFs likely will continue to cut into their active counterparts. Many on Wall Street expected 2016 to be a better year for stock pickers, but that clearly has not been the case.
"As far as the ability of active managers to outperform, that has obviously not been the story for the past 10 years," said Nick Colas, chief market strategist at Convergex. "Correlations are coming down somewhat and volatility should help the active manager. So this is one of those years where they should be able to do well."
Indeed, the news wasn't all bad on the active side.
Small-cap managers did very well, with 80 percent of core funds beating the benchmark and 68 percent of value managers winning.
"With high quality continuing to outperform year-to-date, small cap active managers have benefited given their high quality bias — the opposite of large-cap managers," Subramanian wrote.
Mid-cap funds, however, lagged. Just 13 percent of growth funds beat, though 41 percent of core funds topped.