Fund managers' stock picking accuracy hits 2-year low in July as prices decouple from data, Bank of America says
- Mutual fund managers largely underperformed their benchmarks in July as macroeconomic focus blocked out stocks' dismal fundamentals, Bank of America said Thursday.
- Large-cap active funds' hit rate was just 28% last month, its worst in two years, as managers failed to find names outperforming the market.
- Managers largely ignored the month's best-performing sectors including consumer staples and utilities stocks, the bank said.
- Growth strategies across small-, mid-, and large-cap funds outperformed core and value approaches as investors remained crowded in safer plays.
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Mutual fund managers faltered throughout July as neglected sectors posted unexpected gains.
Large-cap active funds' hit rate — the share of stock picks outperforming the broader market — reached just 28% last month, Bank of America said Thursday, its worst reading in two years. That comes despite stocks enjoying their best July since 2010. The average fund lagged its relevant benchmark index by 0.66%, and only 42% of managers are outperforming their benchmarks year-to-date, the team led by Savita Subramanian said.
The months-long tech rally slowed in July, leading other sectors to jump more than expected. Managers failed to pick many stocks in some of the best-performing pockets of the market, such as the consumer staples and utilities sectors, according to the bank. Both led the S&P 500 in its 5.5% July gain.
Managers expecting worse-than-expected economic data to drive a market slump were also flustered. A slowdown in consumer spending and hiring activity drove fears of a prolonged recession, yet indexes continued to creep higher on stimulus hopes. Correlations neared peak levels over the month, the analysts said, indicating a greater focus on macroeconomic trends than stocks' fundamentals.
Growth-focused managers across large-, mid-, and small-cap funds outperformed their value- and core-focused peers in July. Investors delayed a rotation to riskier value names as coronavirus cases spiked higher.
Still, only 20% of growth funds beat their benchmarks. Concentration in the Russell 1000 led active managers to mostly miss the market's best performers. While growth funds gained the most, value and core managers fared better in picking winning stocks in their respective fields.
Mid-cap funds notched their worst monthly performance since June 2016, with just one-fifth of managers outperforming benchmark indexes. Core funds in the category continued a streak of below-50% hit rates in every month this year.
Small-cap funds offered a less dismal July performance. Nearly three-quarters of all managers beat their respective benchmarks last month, and small-cap growth funds landed their best monthly performance in data going back to 2008, according to Bank of America.
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