Mutual funds set to have their best year of outperformance against benchmarks
According to research from Goldman Sachs, 56% of the 548 active funds in U.S. are currently outperforming their benchmarks.
This may be the best year for North America’s large-cap mutual funds relative to major stock indices since 2007.
The past 15 years’ average of active funds’ outperformance against their benchmarks is 36%, while the funds that aim to beat the S&P 500 have their winning percentage plummeting to 11%.
But what happens now can safely be evaluated as an exception, not the rule.
Mutual funds often get a bad rap for their high fees and mediocre performance. Long term, they have generally been beaten by passive index funds that have substantially lower fees.
This year though, the tables have turned performance-wise. Stock pickers have an average of 2.5% of their assets in cash now, against 1.5% in January, the largest amount since April 2020.
Equity prices plummeted between February and September, so those who actively buy and sell stock for big firms added to their cash holdings.
According to Reuters, it helped that they also reduced their exposure to technology stocks, including Tesla, Amazon.com, Microsoft and Meta Platforms, just as they started to deflate.
Active funds have outperformed the indexes by 86 basis points this year but that drops to just 18 basis points after fees.
Diluted gains because of the fees these managers charge is a problem, since over the past six months money continued to flow from active into passive funds at an above-average rate.
As the year ends, fears of a recession have caused mutual funds to rotate towards stocks with strong balance sheets, low labor costs, and short duration.
This signals a pessimistic economic outlook — one that’s paying off so far.