It’s been a rough few years for stock-picking mutual-fund managers, and investors keep dumping them for the higher returns and lower expenses of index funds.
Now, stock-pickers say, market conditions are starting to turn in their favor as stocks increasingly go in different directions. Many are feeling so confident that they’re paring down the number of stocks they hold to concentrate on the select few they expect to be big winners. That can mean bigger returns than an index fund, but also more risk.
Fighting against the tide: Over the last several years, only a handful of actively managed funds have kept up with the Standard & Poor’s 500 index or other benchmarks, let alone beat them.
Last year, 86 percent of large-cap stock fund managers fell short of the S&P 500, in line with the historical average. For the decade through 2014, 82 percent of large-cap funds couldn’t keep up with the S&P 500, according to S&P Dow Jones Indices.
Investors noticed, and pulled $153 billion from actively managed U.S. stock funds in the first 10 months of this year, according to Morningstar. Nearly that much, $121 billion, went into their index-fund rivals.
With interest rates at record lows in recent years and the Federal Reserve buying bonds to stimulate the economy, stocks climbed and fell together in herds. In 2013, 91 percent of stocks in the Standard & Poor’s 500 index rose.
As Peter Clark, managing director at Jennison Associates, puts it: an actively managed portfolio “struggles when the tide lifts all boats.”
A more split market: This year has seen a shift in that pattern. The S&P 500 is more evenly split between winners and losers. At one end is Netflix, up 154.5 percent through Wednesday. At the other is Consol Energy, down nearly 80 percent.
Fund managers expect this more fractured market to continue, as the Federal Reserve pulls back its stimulus measures. The central bank is widely expected to raise interest rates this upcoming week for the first time in nearly a decade. In such a market, stock-pickers say they’ll finally get rewarded for choosing the right stocks and avoiding the wrong ones.
Jennison’s Clark says he is focusing on fewer stocks. Jennison’s global equity portfolio is invested in about 40 stocks. A couple of years ago, it was closer to 55.
Higher reward, higher risk? Bob Burnstine is an unabashed stock-picker. He used to work at Harris Associates, whose Oakmark Select fund holds only 20 stocks. Since 2011, he’s been investing for clients at Fairpointe Capital, and he now is the lead portfolio manager at the Aston/Fairpointe Focused Equity mutual fund, which holds just 30 to 35 stocks.
That approach has worked in the past. Burnstine beat his benchmark, the Russell 1000 index, and the S&P 500 for the three years through 2014. But this year, the strategy has hurt him.
Burnstine’s fund doesn’t own any Netflix. Or Amazon, or Facebook, or Alphabet, Google’s parent company. He thinks they’re too expensive. But they’ve also been the driving force behind this year’s market gains. As a result, his fund is down 9.2 percent in 2015, versus a 1.3 percent return for an S&P 500 index fund.
“It comes with the territory,” he says.
