52% of large-cap mutual funds have outperformed their benchmarks this year which puts them on pace for their best relative performance since the crisis:
So what’s going on? Has active management become “great” again? Hardly. In fact, as Goldman notes, “the overall improvement in large-cap mutual fund YTD returns cannot be attributed to an increase in total fund active share versus their benchmarks“:
So what’s with the outperformance? Simple. Growth and value managers have simply decided to overweight the goddamn stocks that are driving benchmarks to new highs.
Look at this:
Any guesses as to why the average large cap growth and value fund has outperformed its benchmark by 120 bp and 75 bp while the average large-cap core fund has lagged by 50 bp since the start of 2017? Here’s a hint:
“It’s so simple.” They’re just overweight the stocks that have accounted for a shit load of the S&P’s YTD return. Here’s Goldman:
The average large-cap core fund is underweight eight of the top ten contributors to the S&P 500YTD return. AAPL has accounted for 16% of the S&P 500 return since the start of 2017 and large-cap core funds are underweight the stock by an average of 73 bp. Although growth funds are also underweight AAPL (-253 bp), they are overweight GOOGL (+119 bp), AMZN (+181 bp), and FB (+119 bp), which have together accounted for a total of 20% of the S&P 500 YTD return. Large-cap value funds are overweight three out of the five top YTD return contributors (AAPL, GOOGL, and MSFT).
And, in a hilariously self-referential, brain teaser, the only reason the active share of the average growth and value fund isn’t even lower is because of those overweights:
In fact, as Goldman goes on to note, “Consumer Discretionary and Info Tech account for almost half of the total active share for the average large-cap growth fund.”
Here’s the bottom line, again from Goldman:
The difference between fund allocations to InformationTechnology has been one of the primary drivers of core fund relative underperformance compared with their growth and value counterparts. Information Technology has outperformed the S&P 500 by 11 percentage points YTD (17% vs. 7%), 8 percentage points higher than any other sector. Info Tech is the most overweight sector among large-cap growth funds (+422 bp). Large-cap value funds are also overweight Info Tech by 277 bp vs. the Russell 1000 Value index