In a year of stock picking, the stock pickers have not been up to the task.
According to new data from S&P Dow Jones Indices, 60% of U.S. large-cap equity funds lagged the benchmark S&P 500 Index by 2020.
Last year, the market experienced an unprecedented boom: Like the Covid 19 spread, the US benchmark lost a third of its value in less than five weeks in February and March, before hitting new highs in August and ending the year with gains in the double digits.
The failure of most exchange-traded funds to outperform benchmarks is nothing new, however: 2020 marked the 11th consecutive year that most actively managed U.S. large-cap funds failed to outperform the S&P 500, according to year-end active management data from S&P Dow Jones Indices.
One factor that may have contributed to the market’s woes last year was the stunning performance of major technology stocks that have a strong influence on the S&P 500. The overall 16% year-over-year increase in the U.S. equity index is attributable to an 81% increase in equity exposure.
Apple Inc.
and 76% upside potential for equities
Amazon.com Inc.
Apple’s 81% share growth by 2020 contributed to 16% year-over-year earnings growth for the S&P 500. Apple Store in San Francisco in February.
Photo:
David Paul Morris/Bloomberg News
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The predominance of very large stocks poses a challenge for active managers.
Craig Lazzara,
Global Head of Strategy for S&P Dow Jones Index Investments. You should have a larger position than most active managers if you want to hold an overweight position in the largest stocks, he said.
At the end of December, Apple held 6.7% of the S&P 500, while Amazon accounted for 4.4%.
This year has been different so far: Technology stocks lagged the market as investors gambled on broader economic growth, boosting energy and financial stocks. While the S&P 500 is up 4.9% in 2021, shares of Apple and Amazon are down.
Of the three largest actively managed US large-cap funds, 2020 had mixed results at the end of last year.
Morningstar
Straight ahead.
U.S. Class A Shares The Growth Fund of America, a $256 billion U.S. growth fund at the end of December, earned a 38% return in 2020, outperforming the 18% total return of the S&P 500 and the 33% total return of the S&P 500 Growth Index.
The oldest share class, the Fidelity Contrafund Fund, also classified by Morningstar as a growth fund, delivered a return of just under 33%, outperforming the S&P 500 but lagging the growth index. In contrast, the American Funds Washington Mutual Investors Class A fund had an annualized return of 7.7%, lagging the S&P 500.
Active managers were slightly better at selecting stocks in mid- and small-cap stocks, with 51% and 46% of funds in these categories falling short of their respective S&P benchmarks.
According to the European Commission study, stock picks may be more likely to succeed in sectors such as small caps, where companies often receive less attention than their larger counterparts.
Sarah Samuels,
Director of Investment Management Research at NEPK, an investment advisory firm.
Small-cap names aren’t hidden as well by analysts, she says. It’s not that effective, so you should be able to add more value.
Shares ofTech have lagged the market so far this year, as Amazon shares have fallen while the S&P 500 is up 3.8% in 2021. Amazon packages were delivered in New York last October.
Photo:
Victor J. Bloomberg News
Stock-picking strategies targeting fast-growing companies or low-rated stocks were also relatively successful last year. More than half of large-cap and large-cap growth funds – 62% and 67% respectively – outperformed their benchmarks.
Over the long term, most U.S. equity funds, regardless of category, have not outperformed their respective stock indexes, as evidenced by the S&P Dow Jones Indices. Of the US large-cap funds launched 20 years ago, 6% are still active and have beaten the S&P 500 in that time, the report said.
At the end of 2019, the S&P 500 had $4.6 trillion in passively managed funds and $6.6 trillion in actively managed funds.
Email Karen Langley at [email protected].
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