Good week for S&P 500 held bad news for active funds

Bloomberg

A week of tumult on the trade front was also the best week in a month for S&P 500 bulls.
Active stock managers weren’t celebrating.
They’ve watched in shock as the best-laid efforts to beat benchmarks are squeezed as the contour of the rally shifts. Funds are being betrayed by the companies they love, including tech megacaps and banks, as ones they ignored in industries such as telecom and consumer staples vault to the top.
For the sixth time in seven weeks, companies with the highest ownership among funds trailed those with the lowest, data from Goldman Sachs showed.
If you own a broad-market exchange-trade fund, who cares? But if you’re a fund manager who thought 2018 would be a renaissance year for stock picking, the dream is being deferred. Large-cap funds beating benchmarks this year slipped to 47 percent in June from 52 percent the previous month, data compiled by Bank of America showed.
“The 180-degree turn from the consensus has roiled a number of managers,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors. “Going into 2018, it was all about adding fiscal stimulus and monetary stimulus. It would mean we have a favorable environment for the banking sector.
It would mean a somewhat friendly environment for risk-taking. That quickly reversed.”
The pattern isn’t without precedent. A great year for active management also turned south at the end of 2017 as normally invincible stocks like Facebook and Nvidia turned mortal over several key stretches. While it still managed to be one of the industry’s best years on record, the proportion of funds beating the market slipped to 48 percent in December, from 54 percent in June.
The S&P 500 Index rose
1.5 percent over a holiday-shortened week, the most since early June. The Dow Jones Industrial average added 0.8 percent, ending a three-week streak of declines.
Small-caps outperformed, with the Russell 2000 rallying 3.1 percent, as investors continued to favour domestic-oriented companies amid growing trade tensions.
To be sure, active managers have become more cautious, trimming cyclical positions as the nine-year rally closed in on becoming the longest in history. But the market has been shifting faster since the start of June and most managers still retain a cyclical tilt. Last month, only 39 percent of large-cap funds beat the market, one of the lowest hit rates of the past two years.
It’s bad news for an industry threatened by the transfer of trillions of dollars to passive funds. Years of steady gains have handed anyone who bought an ETF tracking the
S&P 500 an annualised gain of almost 20 percent since 2009. Total assets controlled by passive investors have grown to more than $6 trillion, squeezing the share of active.
“June was a setback for what might have been a record year for active managers,” Bank of America strategists led by Savita Subramanian, wrote in a note this week. “Macro issues likely roiled active funds.”
It’s getting riskier to keep an aggressive stance now that the US and China have exchanged the first shots in a trade war.