Humans beat machines in rocky month for equities
Traditional stockpicking fund managers have enjoyed an unusually good stretch in recent weeks even as machine-driven “quant” funds have fizzled, nurturing hopes that rockier markets may help human investors launch a comeback.
Over half of all US mutual funds that invest in big American companies managed to beat the broader stock market in May for the second month in a row, according to Bank of America. This indicates that many managed to navigate the recent trade war-related turbulence.
So far this year 47 per cent are outperforming the broad Russell 1000 index. Although this still means that over half of US “large-cap” equity mutual funds are trailing the market, if sustained this would be one of the best beat rates in the post-crisis era. Moreover, 54 per cent are beating the blue-chip S&P 500 index.
Traditional, active asset managers have long argued that they would prove their worth in less buoyant markets. Although the long-term evidence that stockpickers outperform in downturns is patchy, their recent run will be encouraging to investment groups that have battled torrential outflows year after year since the crisis.
Active equity funds have shed another $169bn already this year, taking the cumulative outflows over the past decade to $1.31tn, according to EPFR, a mutual fund data provider. In contrast, passive equity funds have attracted over $24bn this year, and $1.9tn over the past decade.
“If active management is ever going to come back, it has to show it can do better in a downturn than the machines can,” said Michael Hartnett, a senior Bank of America strategist.
Algorithmic, “quantitative” funds continued to underperform in May, with just 34 per cent beating their benchmarks due to heavy exposure to underperforming factors like “value” stocks, according to Bank of America.
However, these are mostly “long-only”, relatively simple quant funds that typically only mine one or several well-known signals, such as the long-term tendency for cheap stocks or those with strong balance sheets to perform well. Many quant hedge funds have bounced back this year, especially systematic trend-surfers.
Systematica’s flagship $2.7bn BlueTrend fund lost over 10 per cent last year but is up more than 8 per cent already this year. Similarly, Aspect Capital’s $3.6bn Diversified fund has returned over 10 per cent in 2019, after shedding 14.6 per cent in 2018. The strongest comeback has come from Cantab’s Aristarchus fund, which has flipped last year’s 23 per cent loss into a 20.5 per cent return already in 2019.
The investment industry itself remains gloomy about its future, as relentless pressure on fees and rising cost pressures is expected to crimp asset management margins in the coming years and decades.
Moreover, previous flashes of robust active performance have quickly faded and the longer-term record of active management remains underwhelming. The recent woes of Neil Woodford, a well-known UK stockpicker, shows how fund managers can often see their reputation crumble quickly and a once-deft touch suddenly seem like luck.
Dimensional Fund Advisors’ latest report on the US mutual fund industry indicated that of the 2,314 equity funds that existed two decades ago, only 42 per cent have survived and a mere 23 per cent have outperformed their benchmarks.
“A lot of funds die, and of those that survive only a few outperform the market,” said Marlena Lee, co-head of research at DFA.
Even in fixed income, often assumed to be a less efficient, more active-friendly market, the data are grim reading. Of the 1,826 bond funds registered two decades ago, only 41 per cent are still around, and just 8 per cent have beaten their benchmarks over those 20 years.