Money managers have learned their lesson, and it’s killing them
Goldman Sachs just came out with some research on the performance of stock pickers in 2014, or the lack there of. Long story short: they’re still taking a beating. Many are likely preparing awkward letters to investors.
According to Goldman, just 23% of large-cap mutual fund managers have outperformed the S&P 500 this year. Now, admittedly, most every fund hedges against risk, so indexes have a much better chance of outperforming the pros during bull markets. But, all that said, many fund managers have simply guessed wrong all year. As a point of comparison, roughly 37% of fund managers have outperformed the S&P benchmark since 2003, according to the Wall Street Journal report.
Most fund managers “will be forced to re-evaluate their portfolios or embrace the likelihood of drafting very disappointing year-end letters,” said David Kostin, chief U.S. equity strategist at Goldman Sachs.
The main reason for the poor performance of large cap managers can actually be skewed as a positive, if you happen to be a cockeyed optimist (or one of the people in charge of writing those year-end letters). Stock pickers are more risk averse than they’ve been in the past, which isn’t a bad thing for anyone with a decent long-term memory.
"If you have a portfolio manager making 30 percent, there's a solid chance they can lose 30 percent,” Todd Schoenberger, president of J. Streicher Asset Management, told CNBC last week. There stands the reason why investors continue to flock to fund managers, even those that have booked pedestrian returns since the crisis.
However, no fund manager wants to write those letters, particularly in consecutive years. So, expect the risk taking to increase just a hair. Some fund managers have their bonuses tied to how well they perform as compared to indexes. One equity strategist told CNBC that he expects managers may turn on the “afterburners to hopefully outpace the market by the end of the year."
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Quote of the Day: "We've gone 35 months without a decline of 10 percent or more, and the median since World War II is 12 months. Everybody seems to be waiting for that all-elusive correction, when everyone will pile in. But if everybody's waiting for it, it won't happen." – Sam Stovall, S&P's chief equity strategist