Fund Managers’ Great 2017 Comeback Almost Blew UpBy and
Large-cap funds saw their alpha halved in the space of a week
Tech was over-owned and tanked while lagging groups took off
For most of the year, trouncing the crowd in equities meant sitting on your technology stocks and waiting for the clock to run out. Over two weeks starting in late November, money managers on Wall Street got a reminder of how tough that wait can be.
While you can’t tell from the Dow Jones Industrial Average, mutual funds just endured their roughest stretch of 2017, with nerves tested by an industry rotation that punished beloved picks while lifting everything they hate. Managers watched leads over benchmarks evaporate then miraculously recover, as the market’s placid surface finally broke.
It’s not that anyone’s losing money. Average returns for large-cap growth funds are near 30 percent in 2017, among the best of the bull market. It’s that the one thing every manager wants -- a big year versus passive rivals -- suddenly became less secure as invincible stocks like Facebook Inc. and Nvidia Corp. briefly turned mortal.
“Anybody that’s been owning the things that have been doing really well this year at a level greater than what the index held just got beat up a little bit,” said Jason Browne, chief investment officer at FundX Investment Group. The firm owns a stake in iShares Edge MSCI USA Momentum Factor ETF, which is heading for its first monthly loss in a year.
Ground zero for the reversal was Wednesday, Nov. 29, the worst day for managers all year as the Nasdaq 100 Index trailed the S&P 500 by the most in five months. Since then, the year-to-date edge over benchmarks held by the 50 largest large-cap funds narrowed to 1.8 percentage points from 3.2 percentage points, then bounced back to 2.2 percentage points, according to an analysis by Wells Fargo & Co.
The cushion narrowed as the market turned upside down. A Goldman Sachs index tracking stocks most favored by mutual funds fell 1.3 percent over the week through Dec. 5, while a similar measure of the least favored shares rose 0.4 percent. Prior to that, the most loved had rallied 24 percent this year, more than double the return from the least loved.
“You get confident, you get complacent, you say ‘Oh, I’m the biggest genius in the world.’ Then you get kicked in the butt a little bit,” Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp., said by phone. The firm oversees $2 billion.
The churn can be sifted multiple ways. Value stocks gained on growth, Trump trade winners beat the losers, banks over tech. For the more mathematically minded, it was a breakdown in trade piled into by quant funds. The Bloomberg U.S. pure momentum portfolio had its worst week since April 2016 in the five days through Dec. 1.
“Stock market investors are nervous right now, it’s almost year-end and most are nervously holding on to sizable year-to-date gains,” said Matthew Litfin, portfolio manager of the Columbia Acorn Fund at Columbia Threadneedle Investments. “It’s pretty greedy to complain about a stock down 7 percent on the day when it is up 60 percent year-to-date. That is the kind of thing we are seeing.”
Going by history, it’s still a big year for money managers, thanks to a break in the lockstep equity moves that had hindered stock picking for most of the bull market. With correlations falling to near record lows, almost half of the large-cap funds are outperforming their benchmarks -- way better than the 30 percent or 40 percent that usually do it.
Still, it was a bout of nerves many in the industry could’ve done without in 2017, a year that ranks among the best ever recorded for risk-adjusted returns. Including dividends, the S&P 500 has marched higher for 13 straight months -- including November. Everyone knows there hasn’t been a 3 percent drop between any two dates and that at an average level of 11.2, the Cboe Volatility Index has issued nary a peep.
Icon Advisers’ Derek Rollingson has been doing this too long to be rattled by a few bad days during a year as calm as this one.
“It’s never a comfortable feeling losing money,” said Rollingson, a portfolio manager of the ICON Information Technology Fund, which has fallen about 5 percent in two weeks but remains up 32 percent in 2017. “I’ve had this job for 17 years and we’ve been in such a low volatility. It’s been a blip. This is a nonevent, the amount of volatility we’ve had. Let’s just say in the grand history of the stock market it really hasn’t been that big of a deal.”