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Funds Trail S&P 500 Index By Most Since 1997

Equity mutual funds had their worst year since 1997 relative to the Standard & Poor’s 500 Index, as record-high correlation and price swings made it harder for money managers to pick stocks.

Among about 4,100 funds that invest in large-cap stocks, 17 percent beat the benchmark index for U.S. equities last year, the least since the 12 percent recorded in 1997, based on data from Chicago-based Morningstar Inc.

While the S&P 500 finished 2011 virtually unchanged, the year was marked by record high correlation and volatility amid concern over surging sovereign debt in the U.S. and Europe. Funds performed worse than their benchmark gauges as stocks moved in almost lockstep and managers failed to anticipate a rally in utilities and household-product makers, according to Bank of America Corp.

“The best way to keep pace with the S&P last year would have been a strategy that rotated between sectors based on the macro headlines,” David Spika, who helps oversee $12 billion as an investment strategist at Westwood Holdings Group Inc. in Dallas, wrote in an e-mail today. “However, that’s historically been a very difficult way to manage stock portfolios and flies in the face of those of us who believe in bottom-up, fundamental security selection.”

The S&P 500 rose 8.4 percent in 2011 through April to reach a three-year high, then fell as much as 19 percent through Oct. 3 as Congress and President Barack Obama struggled over deficit cuts and Europe was forced to bail out Greece. The gauge then trimmed the decline as U.S. manufacturing rebounded and the unemployment rate dropped.

Stock Correlation

The 50-day correlation of S&P 500 stocks to gains or losses in the full index increased to a record 0.86 in October, according to data compiled by Westport, Connecticut-based Birinyi Associates Inc. since 1980. A level of 1 would mean all 500 stocks moved together.

The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points on four days for the first time ever in August. Daily share swings in the S&P 500 averaged 2.2 percent that month, the most for any August since 1932, according to data compiled by Bloomberg.

“The big challenge for stock pickers was the fact that macro-economic events were the big drivers of stock prices,” Spika said. “Company fundamentals, including earnings growth, remained very solid, but were largely ignored because so much fear was generated by the negative macro headlines.”

S&P 500 earnings have beaten analysts’ estimates for the past 11 quarters and are forecast to climb above $100 a share in 2012, according to analyst projections compiled by Bloomberg.

While utilities and consumer staples were the only industries with gains from the S&P 500’s peak in April through yesterday, they were the groups most underweighted by fund managers as of the third quarter, according to Bank of America.

“Fund managers were stymied in the second half by a failure of stocks to differentiate from one another,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, wrote in a note yesterday. “Sector positioning likely also hurt active managers.”

To contact the reporter on this story: Lu Wang in New York at

To contact the editor responsible for this story: Nick Baker at

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