Are Mutual Funds Beating the Market?

Passive investing trounced active management for much of the past bull market, as the low-fee strategy of buying and holding a broad index delivered consistent positive returns. A frequent response has been that active managers might underperform during a long and steady bull market, but when stocks crash, active managers can pick winners from losers and earn their keep.

Well, the first half of 2020 was among the most eventful periods in stock-market history, and active mutual fund managers rose to the challenge—somewhat. Large-cap funds are off to their best start to a year in some time, but even so, fewer than half have outperformed their benchmarks.

According to an analysis by a team of strategists at Bank of America Securities, 48% of large-cap mutual funds were ahead in 2020 through this past Monday—the highest rate since the first half of 2017. Not great, but still enough to exceed a low bar for fund performance.

“Fund performance was likely helped by both sector positioning and stock selection,” wrote Savita Subramanian, BofA Securities’ head of U.S. equity and quantitative strategy. “Mutual funds have had a near-record underweight in both energy and financials, the worst-performing sectors year to date, while the stocks most crowded by long-onlies have significantly outperformed neglected stocks (a reversal from recent years).”

In fact, large-cap funds’ top 10 most overweight holdings have outperformed their 10 most underweight—by a solid 20 percentage points—so far this year. That’s been true in only one of the prior six years, says BofA. It’s a sign of active managers being able to differentiate winners from losers in 2020.

The average return of large-cap mutual funds in the first six months of 2020 was a 1.6% loss, versus a loss of less than half a percentage point for the Russell 1000 index.

The best returns came from growth-focused funds—which rose 10.1%, compared with 9.8% for the Russell 1000 Growth index —but the biggest outperformance came from value funds. Their average loss was 15.1%, 1.2 percentage points less than the Russell 1000 Value index’s 16.3% decline, according to BofA.

Read more about mutual funds' performance in the first half of 2020 here.