Stockpickers, nursing
losses despite market's bull run, look to 2017
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[December 27, 2016]
By Trevor Hunnicutt
NEW YORK (Reuters) - Financial pundits
shouted about record high levels for the stock market in 2016, but for
actively managed stock mutual funds there was another record, one they
would rather keep quiet: the largest amount of net withdrawals ever
recorded.
Benchmark equity indexes hit fresh peaks and the S&P 500 is on course
for an eighth consecutive year of positive total returns. However, in
the battle between active and passive funds to grab investment dollars
in a record price environment, there was no contest.
U.S.-based actively managed stock funds suffered $288 billion in
withdrawals year-to-date through November, the largest on record,
according to Thomson Reuters Lipper service. The figure tops outflows of
$139 billion in 2015 and $218 billion in 2008.
On the passive side, stock index mutual funds and equity exchange-traded
funds each attracted about the same amount of new cash, more than $112
billion apiece in 2016, Lipper said.
Just 33 percent of active stock managers beat their benchmark this year,
according to investment bank Jefferies, driving investors to lower-cost
funds and ETFs that try to track indexes, rather than try to beat them.
"If we don't see that in 2017, chances are you've run out of excuses,
and the market will simply come to the conclusion that markets are too
efficient for the number of active managers that are out there, and the
industry as a whole will need to shrink," said Jefferies analyst
Surinder Thind, who covers asset management.
Performance will have to improve to bring investors back, according to
Thind.
Withdrawals came from some of the industry's best-known actively managed
funds.
Investors pulled $8.3 billion from the Will Danoff-managed Fidelity
Contrafund. American Funds' Growth Fund of America had a similar net
withdrawal, representing more than 5 percent of the funds' assets when
the year began.
Outflows of $6.4 billion cost Fidelity Growth Company Fund, managed by
Steve Wymer, more than a seventh of its assets, the data shows.
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"Flows are a lagging indicator that will improve as the market enters
the next cycle for active outperformance - which we believe we may be
seeing," said Fidelity spokesman Charlie Keller.
As the equity rally has matured, stocks have started to move
independently from one another, which active managers say creates new
opportunities.
"It's less about interest rates and geopolitics and maybe more about
what's happening in Company A's income statement versus what's happening
in Company B's income statement," said David Lafferty, chief market
strategist at Natixis Global Asset Management in Boston.
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BOND FUNDS HOLD GROUND
U.S. stock prices rebounded from a February low but stalled heading into
the November election. President-elect Donald Trump's promises to cut
taxes and financial regulations fueled a record-breaking rally.
In contrast, bond prices fell on fears those policies could unleash
inflation, the bane of the fixed-income market. Even so, those concerns
have not erased the net inflows for bond funds that accumulated through
the first 10 months of the year.
In fact, both active and passive bond funds together in 2016 took in the
most cash in three years.
Active bond mutual funds gathered $103 billion while passive bond mutual
funds and fixed-income ETFs took in $145 billion, Lipper said.
The money flowing into bond funds coincides with the U.S. Federal
Reserve's interest rates rising from historic lows. While that could be
a brake on economic growth it does offer yield-starved investors some
relief, but perhaps not enough.
"Investors are going to take a look at this sharp move in interest
rates," said Jefferies' Thind. "Do they really want to be in bonds when
we are potentially in a risk on environment?"
(Reporting by Trevor Hunnicutt; Editing by Daniel Bases and Leslie
Adler)
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