I was recently struck by a Bloomberg article on the hot streak of active, large-cap U.S. stock mutual funds. Barron’s had a similar article claiming active stock pickers had a big July. Both articles cite a Bank of America Merrill Lynch research paper claiming:
- Active U.S. large-cap funds outperformed the appropriate index in six of the last seven months this year.
- Managers’ success has been due to a stock picker’s market where “pair-wise correlation of S&P 500 stocks” is at a 17-year low.
- Managers benefited from a record overweight in tech and bias toward “low-quality stocks.”
Is it now a stock picker’s market? According to William Sharpe’s paper, “Arithmetic of Active Management,” this claim is unlikely to be true. Sharpe states:
“Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.”
So I requested a copy of the not-publicly available Merrill Lynch research paper, “US Mutual Fund Performance Update: Record Outperformance Streak.” I also interviewed one of its authors, Jill Carey Hall, VP of U.S. Equity Strategy team at Bank of America Merrill Lynch. The paper showed that February was the only month where less than half of the funds bested their benchmark.