It turns out there is a way to succeed as a stock picker in this difficult market: Just pick the stocks the pros don't like.
Active fund managers have been getting clobbered this year, with just 16 percent outperforming basic indexes in 2016. That inability to generate alpha has played a large part in investors flocking to the exits from traditional, actively managed mutual funds and plowing money into passive exchange-traded funds, most of which track benchmarks like the S&P 500.
In all, $221.7 billion has fled actively managed funds over the past 12 months, while $174.8 billion has gone to their passive counterparts, according to Morningstar.
For those willing to keep playing in the stock-picking arena, though, there's a fairly simple and intuitive solution. The least-loved stocks by active managers have outperformed the most-loved by 13 percentage points in 2016, according to Bank of America Merrill Lynch, providing investors a reason to steer clear of the herd mentality that too often permeates investor psychology.
Pitting most-loved against least-loved has been a solid strategy for the past several years, but too often gets ignored in a momentum-driven market.
In this market, going with a least-loved strategy means selling heavily owned positions like Activision Blizzard, NetApp, Broadcom, salesforce.com and Viacom, and buying underowned companies including People's United Financial, Leggett & Platt, Alliant Energy, Brown-Forman and Apartment Investment and Management.
To be sure, stock picking continues to be a rough game.
Hedge funds saw core performance rise 6.4 percent in the third quarter, a move generated in tandem with the $2.9 trillion industry cutting its stock exposure and amping up its ETF holdings by $8.5 billion in the quarter, which BofAML said is a record pace.
Stock exposure generally is at a three-year low. Hedge funds also rotated out of financials and consumer discretionary stocks.