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Active managers are having a breakout year and Goldman Sachs has a way to mirror their strategy.
The share of mutual funds outperforming their benchmarks this year up to 42% in 2019 so far — beating their 10-year average of 34%, according to analysis by Goldman Sachs. The firm has a portfolio to track stocks where these funds have the most overweight positions. This year, the basket of stocks has outperformed the S&P 500 by 2.4 percentage points.
Although actively managed funds are still seeing net outflows, the exits were "significantly" lower this year.
"Solid YTD fund returns, elevated uncertainty, and a 'late-cycle' mindset among investors have also likely reduced outﬂows from active management in 2019 relative to the past few years," Goldman Sachs chief U.S. equity strategist David Kostin said in a note to clients Wednesday.
Goldman tracks performance through 50 stocks where the average large-cap funds are more bullish. The funds are most overweight Visa, Comcast, Salesforce.com, Google parent company Alphabet and ServiceNow. That group has outperformed mutual funds' underweight positions by 1.6%. Mutual funds are most underweight Apple, Berkshire Hathaway, Exxon, Johnson & Johnson, and Amazon.
Kostin highlighted the winning strategy: taking more bets on the consumer discretionary sector where mutual funds are most overweight. Bets on the industrials sector have also beneﬁted relative fund performance.
Fund managers have been dialing back exposure to industries and stocks most exposed to the ongoing U.S.- China trade war — a move "which has beneﬁted relative fund returns in recent weeks." Mutual funds are underweight the 20 stocks with the highest sales exposure to China by 54 basis points. Those names have lagged the since early May when President Donald Trump tweeted about raising tariffs to 25% tariffs on $200 billion of Chinese goods.
"The escalation in trade tensions has also likely supported recent relative fund returns," Kostin said.
But you wouldn't want follow mutual funds' every move. Despite the solid performance, an overweight tilt towards the healthcare sector — biggest laggard year to date — was a miss for most active investors. The bulk of them also missed out by being mostly underweight on a Real Estate rally, which outperformed the S&P this year.
Active managers are also facing more pressure from a rise in low-cost passive investing. Fees on index funds and ETFs have plummeted in the past decade as asset managers compete on slashing fees. The amount of money invested in passive funds has more than doubled since 2009, now making up 54% of all assets under management, according to a Bank of America Merrill Lynch report last week.