2016: Actively Managed Stock Funds Continue Their Dismal Performance

Cheri Franklin |

“A Very Bad Year for Stock Pickers” is the title of a Wall Street Journal article (8/13/2016) by Justin Lahart. Citing data published by Bank of America Merrill Lynch (which funnels a large chunk of its clients’ money into actively managed funds), Lahart notes that in the decade ending in 2015, an average of just 37% of large-cap mutual funds outperformed the Russell 1000 in any given year. This lines up with the S&P Dow Jones Indices SPIVA® U.S. Scorecard which reports that only 18% of large-cap mutual funds both survived and outperformed the S&P 500 over the same ten-year period. For all calendar years starting from 2003, there has only been one (2007) where more than half the funds outperformed the Russell 1000, according to the Bank of America Merrill Lynch data.

For the first seven months of 2016, the news only gets worse, as only 14% outperformed. Lahart brings forth several possible explanations such as the movement of individual investors away from individual stocks, “leaving fund managers with fewer patsies at the poker table to take chips from.” He also cites the often-heard “tighter correlations” explanation due to stocks movement more explained by global macro events such as Brexit than earnings and other fundamentals. Lahart voices his optimism, “With Brexit risks looking contained, global economic concerns are moving to the back burner.” This supposedly will provide an opportunity for active managers to shine, but as Lahart notes, “The bad news: They will have even fewer excuses if they underperform.”

At Clarity, we hope that all of Merrill Lynch’s clients are exposed to this data, and if they have suffered in an underperforming active fund, they should demand an explanation from their broker. If none is forthcoming, they should consider hiring a true fiduciary to manage their investments and help them create a sound financial plan.