Just weeks after professional stock pickers celebrated their best year since 2017, the wind in the stock market has shifted, upending their fate.
Only 29% of the core mutual funds tracked by Bank of America Corp. were ahead of their benchmarks in the first month of 2023. This is their worst showing since last July. In 2022, 61% of these funds had beaten their benchmarks.
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The reversal in fortune came as stocks defied all bear warnings to mount a powerful rally that lifted the S&P 500 by 6% in January. Money managers who raised their cash holdings during 2022’s bear market may have been caught off guard, with returns hindered by defensive positioning.
“By mid-December, the ‘1H down, 2H up’ equity call was firmly the consensus, driving us to highlight that the key risk heading into 2023 was that of being underinvested or of being too defensive,” BofA strategists including Savita Subramanian and Ohsung Kwon wrote in a note Thursday. “We now hear the reverse mantra ‘up in 1H, down in 2H,’ but we think clients are not fully positioned as such.”
Professional investors have started 2023 mostly frustrated as they watch all the trends from last year reversing. Cyclical stocks are beating defensive equities after lagging in 2022. A similar turnabout was also on display between small-cap versus large-cap and growth versus value.
The result was a flip in fund performance, with last year’s winners such as value and quant funds losing their edge. However, growth funds, most of which trailed in 2022, had a good month.
Stocks have climbed in the new year as optimism over the Federal Reserve’s ability to curb inflation gathered steam. Falling bond yields have taken some pressure off the once-beaten down, expensive stocks such as software makers and internet companies, an industry that got little love from money managers near the end of last year.
Core funds with no bias toward growth or value suffered as technology stocks rebounded in January. Mutual funds were most underweight in technology, according to a December report from Goldman Sachs Group Inc. The largest tech firms, such as Apple Inc., saw their holdings in the average fund amount to nearly 5 percentage points below their representation in a benchmark.
Read the full article here by Lu Wang, Advisor Perspectives.
