Stock pickers off to good start in ’ 17

January aside, track record shows large- cap managers have trouble beating passive funds

A Wall Street- style revenge of the nerds could be underway in the investing world.

Beleaguered pickers who run funds that invest in big U. S. stocks are flashing signs of a comeback in their well- publicized battle with “passive” funds, such as index funds and exchange- traded funds that mimic the performance of benchmarks such as the Standard & Poor’s 500 and Russell 1000 stock indexes.

In January, 52.4% of active large- cap fund managers — spreadsheet- toting financial folks who pick stocks with the intent of beating the market — posted returns that topped the benchmark large- company Russell 1000, data from Bank of America Merrill Lynch show. That’s up from 26% beating the benchmark in December and 19% who outgained the index, which consists of the 1,000 biggest U. S. companies, last year.

Fund managers in the mold of legends such as retired Fidelity Magellan manager Peter Lynch and ex- Legg Mason Value Trust manager Bill Miller, are a vanishing breed. Indeed, funds run by managers who do voluminous research in hopes of separating winners from losers have been falling short vs. the benchmarks they’re paid to beat.

U. S. stock funds run by stock pickers have posted smaller returns than passive funds for three consecutive years and have fallen short six of the past nine years going back to 2008, according to Morningstar. In 2016, passively managed stock funds returned an average 14.6%, more than 3 percentage points better than actively managed funds.

The performance shortfall can be attributed to headwinds. For example, funds run by stock pickers, unlike index funds, typically don’t have 100% of their assets invested in stocks. Cash is a drag in up markets, making it harder to maximize returns in prolonged bull markets.

Actively managed funds also suffer a performance drag from their higher fee structure. U. S. funds run by stock pickers carry an average expense ratio of 1.27%, vs. 0.53% for passively managed funds, according to Morningstar. Active funds have been hindered by a mass exodus of cash.

So what factors early in 2017 helped funds run by stock pickers do slightly better than passively run funds?

uIn high- correlation market environments pretty much everything moves up and down together, which makes it tough for stock pickers to stand out. But lately stocks have been moving less and less in tandem, giving stock pickers more of an edge, says Dan Suzuki, strategist at BofA Merrill Lynch.

uThere is a wider range in returns, which favors pickers who correctly identify winners.