Chew On This: Mutual Funds Should Have 'Bought The Stocks They Hated'

How about this for some irony? According to a Bloomberg report, the S&P 500 index is higher by around 6 percent, but Goldman Sachs' index of the stocks most favored by mutual funds are just flat year-to-date. Meanwhile, a basket of stocks that includes the least favored stocks has performed better than the S&P 500 index.

Bloomberg cited Goldman Sachs Chief U.S. Equity Strategist David Kostin as saying mutual funds misjudged the equity-market performance at the industry level.

"At the sector level, the most overweight sectors, such as Financial Services, have lagged the market while out-of-favor sectors have outperformed," he wrote in a report.

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There is, however, some hope for investors whose mutual funds are lagging the market. According to Kostin, the basket of mutual funds' favorite stocks began outperforming the S&P 500 index in the third quarter. Leading the charge is cyclical stocks, such as banks, that typically perform better when economic growth is strong.

Nevertheless, he added that low GDP growth and the Federal Reserve's "uncertain" policy does pose a risk to cyclical stocks through the end of the year.

Bottom line, stocks that were "beloved" by mutual funds under-performed the market, which resulted in just 16 percent of large-cap mutual funds posting superior returns relative to their benchmarks which is notably below the 10-year average of 37 percent.

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