Market Overview

Active Fund Managers Are Having A Better Year In 2020

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Active fund managers have had their best first half of the year since 2017, probably due to a combination of sector positioning and stock picking. 

Stock picking boosted performance among active managers

Bank of America strategists said in a note this week that the 10 stocks active managers are most overweight on have outperformed the 10 stocks that are most neglected by active managers. That marks a significant reversal from past years. 

It means active fund managers have mostly avoided stocks that resulted in large drawdowns. BofA strategists said if active fund managers can continue to generate alpha, it should help slow the ongoing shift from actively managed funds into passive ones. 

The stocks with the most upside risk based on positioning include Mosaic Company, Chipotle Mexican Grill, Alexion Pharmaceuticals, Take-Two Interactive and L Brands, according to BofA data. The stocks with the most downside risk based on positioning are United Rentals, Mohawk Industries, Robert Half International, Iron Mountain and National Oilwell Varco. 

ESG Also Drove Gains Among Active Funds

However, the firm also said that inflows to passive funds and exchange-traded funds have picked up significantly since the market trough. That marks a major reversal from the record outflows observed during the selloff in late February and early March. 

One other area of outperformance in the first half of the year was in stocks that are most owned by funds with a focus on environmental, social and governance (ESG) issues. The top 50 stocks that are most widely owned by ESG funds have outperformed the bottom 50 stocks by 22 percentage points. 

The most widely held stocks by ESG funds include Alphabet, Microsoft, Ecolab, Accenture, Adobe, Home Depot, American Express, Texas Instruments, Visa and V.F. Corporation. Other names on the top 50 list include Apple, PepsiCo, Coca-Cola, Nike, Verizon, Walt Disney, BlackRock, HP, NVIDIA and Amazon. 

BofA said ESG funds have seen inflows for the last 21 straight weeks stretching back to the middle of January. The COVID-19 pandemic and calls for racial justice following the death of George Floyd have highlighted social issues like diversity, employee satisfaction and product safety. BofA strategists added that behavioral finance suggests that social factors will have a widening premium in the years to come. 

Sector Positioning Drove Performance Too

Sector positioning has also helped long-only active fund managers outperform. Funds slashed their exposures to Financials, Energy and Materials to record of near-record underweight positioning, based on BofA data that goes back to 2008. 

Hedge funds are making the same sector rotation. The firm said both groups' relative weights in those three sectors are nearly two standard deviations below their long-term averages. However, hedge funds are being more aggressive and possibly speculative on Consumer Discretionary and Health Care stocks compared to long-only managers. Hedge funds' overweight is mostly in Retail Industries and Biotech. 

About the Author

Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.

 

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