Professional stock pickers who profited from last year’s volatility were ready for more of the same in 2023. They purchased something completely different, and the cost is reflected in their returns.
What Do Statistics of Bank of America Say?
According to data obtained by Bank of America Corp., the first quarter’s performance was the worst since 2020, with barely one in three actively managed mutual funds outperforming market benchmarks. In comparison, the hit rate in 2022 was 47%, the highest in the previous five years.
After numerous regional bankers failed, most active funds’ propensity to favor banks backfired. The number of profitable companies decreased in an increasingly top-heavy market. An ineffective conservative posture for an unexpected equity surge made matters worse.
After the bear market of 2022, cash has become one of Wall Street’s preferred hedging instruments. Cash levels remained over 5% for 15 straight months, the longest stretch since 2002, according to the most recent Bank of America Corp. poll of money managers.
Cash’s 5% annual yield is not insignificant, but it was less than the benchmark S&P 500’s 7% first-quarter increase.
Of course, even the best stock pickers occasionally underperform the market, and all the prudence may prove to be wise given the foreboding environment facing risky assets, including monetary tightening, earnings downgrades, and high equities valuations.
But compared to last year, when stock pickers could shine during the market selloff, active management could be better this time. Any additional underperformance would damage their position in the fight against the rise of passive investing, which is already difficult.
Misjudged Industry Bets
Misjudged industry bets made the pain worse. According to statistics from Goldman Sachs Group Inc., large-cap core funds preferred financial shares at the beginning of the quarter more than any other significant groupings except industrials. The least favored topic was technology.
The real estate sector’s performance was practically the exact reverse. Out of the 11 S&P 500 industries, financial shares lost the most, or 6%, as bank failures raised doubts about the sector’s viability. As money sought refuge in cash-rich businesses, the tech sector grew by 21%.
Overall, during the first quarter, the most popular equities among mutual funds lagged behind their least popular by 7.5 percentage points.
According to Bloomberg News, the number of market-beating stocks available to money managers is shrinking. Compared to 47% in 2022, only 33% of the Russell 3000 members have exceeded this year. Additionally, the tech sector is home to many of the major winners.
Take a look at these numbers. You can see the difficulty stock pickers face: in the first quarter. The tech-heavy Nasdaq 100 rose 20%, compared to a 6.7% gain for the Russell 3000. Since 2001, the difference in favor of the latter has increased the most.
