Beating the market is difficult at the best of times. So with volatility reaching its highest levels in five years, it is impressive that active mutual fund managers seem to be ahead of the index for the year, says the FT’s John Authers in Friday’s Short View column.
At the end of last week – and the market’s negative response to this week’s Federal Reserve meeting and the plan by central banks to revive money markets may have changed things – US diversified equity funds had beaten the return on the S&P 500 by a percentage point, according to Lipper.
This was difficult, as the market narrowed this year.
Throughout this decade, the S&P 500 equal-weighted index has run ahead of the market value-weighted version – showing that most stocks have been ahead of the index. That was a legacy of the S&P’s 2000 peak, which accompanied gross overvaluation for tech stocks.
This made it relatively easy to beat the index for a while but that historic mis-valuation has now been squeezed out.
To beat the market this year, it was also necessary to foresee the switch from value stocks, which are cheap, to growth stocks whose earnings are growing. For the year to date, the Russell 3000 growth index of US stocks is up 12.5 per cent while the Russell 3000 value index is up only 0.2 per cent. This was the reversal of a trend that has lasted since 2000.
The problems for value can partly be attributed to another trend: the collapse of financials, which tend to be value stocks. This happened after a decade in which financials moved in line with the S&P.
So the oft-maligned “long-only” equity managers have reason to feel proud.
Beating the market this year was not easy. The question now is whether momentum can be maintained in the sectors that have worked well for them this year, such as materials, and whether managers have a fallback plan if the developed world slips into recession.