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Mutual funds are showing some signs of life — finally

A change in market leadership helped stock pickers beat the market for the month, though it's still been a lousy year.

Seedling growing
Kiyoshi Ota | Bloomberg | Getty Images

In an otherwise dismal year for professional stock pickers, July offered some hope.

Large-cap mutual fund managers put in a strong performance, with 58 percent beating their Russell 1000 index benchmark, according to data from Bank of America Merrill Lynch. The average manager in the category saw a 4 percent return for the month, against the Russell's gain of 3.8 percent.

The returns came against the backdrop of a market that snapped back after the post-Brexit selloff. Sectors that had been punished during the panic over Britain leaving the European Union showed strong returns as market sentiment improved and the major averages moved into solidly positive territory for the year.

The outperformance happened even as correlations, or the tendency of stocks to move up and down together, remained elevated at 34 percent and the dispersion of sector returns also was low.

"Part of it was a pretty decent earnings season, and just general sentiment in the market was better," said Aaron Jett, vice president of global equity research at Bel Air Investment Advisors. "But more importantly, there was totally different leadership in the market vs. the first half of the year."

The period through June saw dividend-oriented sectors such as consumer staples, utility and telecommunications lead the way. Technology and health care formed the leadership in July, both sectors that have heavier weighting in many active portfolios, Jett said.

"Stock selection mattered more in July," he said. "It's one month, but we think it can persist."

Growth and value managers performed especially well, with 67 percent beating their respective benchmarks. Small-cap managers had a bad month but are doing best year to date, with a 43 percent outperformance rate.

It's been a tough year for active management, the category under which most mutual funds fall, and 2016 is tracking as one of the worst ever.

Even with the solid July, just 14 percent of large-cap managers are outperforming this year. The good month propelled the three-month beat rate to 22 percent, according to BofAML.

Mutual funds are fighting to stem the tide of the growing exchange-traded fund industry. ETF assets have ballooned to about $2.3 trillion — still well behind the $13.2 trillion mutual fund industry, but gaining. Though active funds have been entering the ETF space, most track indexes like the S&P 500 and various sectors.

Active U.S. equity funds saw $21.7 billion in outflows during June, which Morningstar said was the biggest loss since October 2008.