Stock pickers are beating the market in unusually large numbers this year, raising the age-old question about whether their success can be attributed more to luck or skill.
Nearly 70% of the roughly 2,850 actively managed US stock mutual funds with the stated goal of beating the S&P 500 Index have done so this year through last week. That’s a vast improvement from last year, when just 15% of US large-cap stock pickers beat the market, according to S&P’s latest SPIVA report tracking the performance of active managers. It’s also much higher than normal. On average, roughly 35% of managers have outpaced the S&P 500 in any calendar year, based on annual results back to 2007.
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Even so, the results this year aren’t entirely surprising. Most stock pickers invest in a broad cross section of the market, from fast-growing technology companies to boring banks and manufacturers. Until recently, tech stocks were the best performers for many years, which ballooned their market value relative to other stocks and gave them an ever-larger slice of indexes like the S&P 500 that weight stocks by size. While tech was hot, it was impossible for a broadly diversified portfolio to keep up. Now it’s just the opposite — with tech stocks leading the declines, well-rounded portfolios have the edge.
It’s a mistake, however, to assume that active managers’ recent success will persist. The evidence is overwhelming that the longer they play the game, the more likely they are to lose. The latest SPIVA report is typical: Just 17% of US large-cap stock pickers beat the S&P 500 over the past 10 years through 2021, and that number drops to 6% over 20 years.
Time makes a fool of most stock pickers. Institutional investors once called hedge fund manager Gabe Plotkin a “wunderkind” after he racked up gains of 30% a year over a half-decade. Billionaire Ken Griffin, who backed Plotkin’s fund, called him “an iconic investor” who “did an incredible job for his investors” in a recent interview with Bloomberg Intelligence.
Now Plotkin is closing his fund after declines of 39% last year and 23% this year through April. Griffin’s reaction: “The average hedge fund lives for about three years. So several hundred shut down a year and the world goes on.” So much for skill.
Even more revered is Chase Coleman, founder of hedge fund Tiger Global Management. His two-decade-old fund reportedly generated returns of more than 20% a year through 2020, aided by big bets on technology. Now those bets are souring. After a down year in 2021, Coleman’s main hedge fund is down 44% this year through April, and his long-only fund has tumbled 52%. What happened? “Markets have not been cooperative,” Tiger Global wrote to investors. They rarely are to stock pickers.
Not even the most admired track records are necessarily a show of skill. Perhaps the most revered belongs to Peter Lynch, who racked up a return of 29% a year at the helm of Fidelity’s Magellan Fund from 1977 to 1990, including dividends. He outpaced the S&P 500, the fund’s benchmark, by more than 13% a year during that time.
Read the full article here by Nir Kaissar, Advisor Perspectives.
