Active managers, after years of suffering through a low-volatility stock market that has made their lives miserable, are finally showing signs of life.
The first half of 2017 saw 54 percent of large-cap managers beat their benchmarks. That number may not sound remarkable on its face but is actually the first time a majority achieved the feat in the first half since 2009, when Bank of America Merrill Lynch first started tracking the performance. Sixty percent beat in the second quarter, the best since the first quarter of 2009.
Low volatility has long been the enemy of stock pickers, and that story hasn't changed much this year. The most conventional measure, the CBOE Volatility Index, has been mired around multiyear lows for much of 2017. However, several other factors have colluded to make life easier.
For one, fund managers have simply gotten better at sector selection.
They set a record for overweight positions in the red-hot tech sector, which gained 17.2 percent in the first half. They also had higher than normal allocations to discretionary and health care, the second- and third-best sectors. Managers are holding record-low positions in weak-performing staples, utilities and telecom shares, according to BofAML.
Another factor has been correlations, or the tendency stocks have had to move up and down together during the eight-year bull market run. High correlations make it more difficult for active managers to find price discrepancies needed for outperformance, and correlations have come down this year.
Finally, style has helped — 71 percent of value managers and 64 percent of growth managers have outperformed. Core managers, who blend both styles, saw just a 36 percent outperform rate.
One blip in the active outperformance has come from small caps, which have seen just 42 percent of managers outperform. June was a particularly difficult month, with an outperform rate of just 18 percent.
The ability of active fund managers to beat basic benchmarks like the various S&P and Russell indexes is important at a time when investors increasingly are turning to ETF-based passive strategies.
Exchange-traded funds track the indexes themselves and generally come with significantly lower fees. Even while active managers' performance improved this year, investors piled a fresh $245 billion of new money into ETFs during the first half, bringing total assets to just under $3 trillion, according to State Street Global Advisors and XTF.
Investors have pushed $702.9 billion into passive strategies over the past 12 months while pulling $278.7 billion from active funds over the past 12 months, according to Morningstar data through May. Included in that total is $308.3 billion of inflows to passive stock funds and $263.6 billion in outflows to active equity funds.
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