- 52% of value mutual funds beat benchmark but returns suffer
- Owning Amazon shares helped determine a fund's success
For devotees of actively managed mutual funds in 2015, even when you won you lost.
Take funds that do value investing in the biggest companies, the one corner of the market where stock-picking managers actually did better than benchmarks last year. By one definition, it was a good year: more than half of large-cap active managers in the category posted returns that exceeded relevant indexes in 2015. That return? Negative 4.2 percent.
In other words, to claim bragging rights over the robots, you had to be locked into an investing style that itself trailed the Standard & Poor’s 500 Index total return by about 6 percentage points and ended up losing money. Add this to the list of reasons that 2015 saw an unprecedented amount of money flow to passive from active strategies.
“Investors have not been wanting their odds to be essentially a coin flip -- it doesn’t make a good case for active management,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ Inc. “If the best-performing group is just as good as the benchmark, perhaps it’s just better to replicate the benchmark with a passive investment tool. That’s certainly what the flows have been saying.”
About $116 billion was withdrawn from active mutual funds in 2015, data from the Investment Company Institute tracking equity and bond funds show. That’s the largest outflow since 2008. Meanwhile, U.S. exchange-traded funds saw $241 billion in net flows, according to Bloomberg data.
You probably heard that actively managed mutual funds had another rough year trying to keep up with the market. Broadly speaking, 63 percent of large-cap managers posted a return in 2015 that fell behind the benchmark, the eighth-straight year that a majority of managers underperformed, according to data compiled by Morningstar Inc.
Narrowing it down to value, which seeks out stocks priced at deep discounts to things like earnings and sales, and the results look a little better. Fifty-two percent of funds in the value group beat the Russell 1000 Index, the highest rate in seven years, data from Morningstar show.
Cash helped. Unlike an index, value managers can, and likely did, sit on a reasonable amount of cash, Rosenbluth said. As managers took profits along the way, they could protect themselves as the benchmark slumped. When stocks go down, cash stays put.
What’s more, the benchmark’s bleak performance in 2015 meant that even funds which lost money could claim victory over the gauge. The Russell 1000 Value Index dropped 6.2 percent last year, its worst since 2008.
“For value managers outperforming, part of it is a function of value’s tough year last year in general,” Dan Suzuki, investment strategist at Bank of America, said. “When a benchmark doesn’t do as well, it’s a lower bar to clear. It also could have been whether or not you held some of the bigger contributors.”
With market breadth diminishing, dispersion was below the historical average last year, Suzuki said. Far fewer stocks in the S&P 500 rose during 2015 compared with 2014: 44 percent versus 75 percent. That could potentially amplify the effects of getting one or two picks right.
Energy producers were the worst performers last year as the price of oil plummeted. Underweight energy, which makes up 12 percent of the Russell 1000 Value Index, and your fund had a good shot at beating the gauge.
“If we had a more balanced market they wouldn’t have been as robust in beating the benchmark,” said David Spika, global investment strategist for GuideStone Capital Management. “All value managers had to do was be underweight materials and energy and they would outperform. For growth managers, you had only a number of growth stocks that led the gain.”
Growth funds advanced 5.1 percent on average, compared to value’s 4.2 percent decline, according to funds tracked by Bank of America. They were buoyed by the so-called “FANG” megacaps -- Facebook Inc., Amazon.com Inc., Netflix Inc., and Google’s owner Alphabet Inc. -- that fall into the growth camp. The stocks dominated 2015’s gains, advancing 74 percent for the year.
Among the 25 best-performing funds, 80 percent owned Amazon, data compiled by Bank of America show. For the worst 25, only 16 percent owned the online retailer. Amazon, the fifth most heavily weighted stock in the Russell large cap index, advanced 118 percent in 2015.
While the average growth fund had better returns than value, the majority of growth managers still couldn’t claim victory over their respective benchmark. In 2015, 34 percent of managers outperformed the Russell 1000 Growth Index.
“Would an investor be happier making money but trailing the benchmark, or losing less money than the benchmark? They’d rather be making money,” S&P Capital IQ Inc.’s Rosenbluth said. “Last year was no different than prior years in that it’s hard for active managers to beat the benchmark when there’s a cost of active management. The benchmark is free.”