Active investing outperforms in September amid brutal stock market decline | Job Binary

(Bloomberg) — In an environment where inflation has settled and central banks continue to tighten, one strategy has fared relatively well: active investing.

Bank of America data shows that 59% of large-cap active funds outperformed the Russell 1000 in September amid market brutality. Value stocks in particular had a strong month, outperforming the Russell 1000 value index by 73%, the 90th percentile month and the best beat since June 2020, strategists led by Savita Subramanian wrote in a recent note.

Active managers have a habit of doing well when the market is down. Not sure why: Earnings are often cited as expanding, although it’s debatable whether that was the case last month. A few years ago, researchers showed that when indexes rise, their gains tend to be concentrated in a few superstar stocks that the most active managers cannot own. When they fall, that dynamic reverses, and it may be true that stocks don’t go with the biggest losers.

According to Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, active funds did well in September when U.S. stocks saw their worst monthly decline since March 2020 as many devalued.

“The first half of the third quarter was a big rally, the market went up and I think mutual funds underperformed because they had higher cash positions,” Ren said in an interview. “September gave them some relief, but probably not enough to outperform most of their indexes.”

Indeed, their performance in September was not enough to give a positive result for the quarter. Active funds underperformed in the third quarter, with only 39% beating their benchmarks, according to Bank of America data. Value stocks have fared better year-to-date with a 55% hit rate, with core at 38% and growth at 31%.

“It was a challenging environment for active funds, with above-average pair correlation (ie a macro-focused market) and scarce alpha opportunities,” the bank’s strategists said.

This has been particularly difficult for small and mid-cap funds, which have underperformed their larger-cap counterparts. Only 20% of small-cap stocks outperformed the Russell 2000 benchmark during the quarter.

“The market has turned macro as we’ve seen the pair’s correlation well above its long-term average,” said Jefferies strategists led by Stephen DeSanctis. “It means the fundamentals are less important.”

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