Though 2021 was overwhelmingly good for the U.S. stock market, most stock-picking fund managers were disappointed by it, contends an article in The Wall Street Journal. While the S&P 500 garnered a total return of 28.7% last year, stock-pickers failed for the 12th year in a row to beat the benchmark. Indeed, the lowest number of stock-pickers beat the benchmark last year since 2014, making it especially dismal.
What’s the cause? The performance gap between growth and value stocks significantly narrowed last year, with only 5 of the highest-contributing companies accounting for 31% of the S&P 500’s total return. That’s less than half of 2020. That reduction in opportunity could be a reason why many stock pickers fell short of delivering better results. Last year, the average return for large-cap U.S. funds was “23.3% more than 5 percentage points lower than that of the S&P 500, according to Dow Jones Indices,” the article maintains, but this year has brought corrections to the major U.S. stock indexes, and declines of 10% or more from last year’s highs. Factor in inflation, tightening by the Fed, commodity prices in the face of the Ukraine war, and 2022 is a much different landscape than 2021.
Growth stocks have suffered more than value, as the S&P 500 value index declined 4% in 2022 so far versus the 15.9% decline for the S&P 500 growth index. Those managers who weighted their clients’ portfolios towards growth, betting on continued growth outperformance, might be rethinking that strategy now. So far this year, 57 out of the 100 biggest actively managed U.S. mutual funds which invest in U.S. large-cap stocks have had lower returns.
Though theoretically a volatile stock market provides a good environment for active managers to select stocks, history has told a different story: active management has faltered in volatile markets over the last 12 years. At the end of 2020, $5.4 trillion of the S&P 500 was indexed in passively managed funds, while actively managed funds had benchmarked $8 trillion, the article concludes.