The market turmoil induced by heightened U.S.-China trade tensions appears to set the stage for improved performance by active investment managers, known widely in the industry as stock pickers. Some 42% of actively-managed large cap mutual funds have beaten their benchmarks year-to-date as of this week, significantly better than the 10-year average of 34%, Goldman Sachs says in a new report, based on their analysis of 632 funds investing in U.S. stocks that have a combined $2.5 trillion of assets under management (AUM).

Goldman's own basket of the 50 stocks with the most overweight positions among mutual funds handily beat the S&P 500 index, rising 17% YTD as of May 20. Goldman's basket of the 50 stocks with the most underweight positions also led, rising 15%.

"Overweight allocations to Consumer Discretionary and Industrials and the outperformance of the most overweight fund positions have contributed to solid mutual fund returns YTD. Active managers are also underweight the industries and stocks most exposed to the US-China trade war, which has benefited relative fund returns in recent weeks," Goldman says.

The table below summarizes some key findings by Goldman.

Performance Boosters For Actively-Managed Funds In 2019

  • The most overweight fund positions are beating the S&P 500
  • The positive performance gap is 240 basis points (bps) YTD
  • Biggest overweight for the funds is consumer discretionary
  • Consumer discretionary outperformed S&P 500 by 320 bps YTD
  • Funds are underweight stocks at high risk in U.S.-China trade war
  • Top 20 S&P 500 stocks in China sales exposure have plunged
  • These 20 stocks were down 15% from May 5 through May 20

Source: Goldman Sachs, Mutual Fundamentals report, May 21, 2019

Significance For Investors

Goldman's analysis includes domestic large-cap core, large-cap growth, large-cap value, and small-cap core funds, and excludes ETFs and index objective funds. "Growth fund returns have been the strongest in absolute and relative terms but the share of core and value managers outperforming their respective benchmarks have also exceeded their 10-year averages," the report observes.

A key to the funds' improved performance is they trimmed their average exposures to cyclical sectors and rotated toward secular growth. Funds raised their relative allocation most to Information Technology (+43 bp vs. 4Q 2018), driven primarily by Software. However, allocation to the sector still remains below the five-year average. In contrast, managers reduced their overweight exposures to Energy, Industrials, and Materials, says Goldman. The S&P 500 Information Technology Index was up by 19.2% YTD through May 20, versus a 13.3% gain for the S&P 500 as a whole, per S&P Dow Jones Indices.

As summarized in the table above, Goldman's basket of the 50 stocks with the most overweight positions among large-cap core, growth, and value mutual funds beat the S&P 500 by 240 bp YTD. Meanwhile, the most overweight stocks outperformed the most underweight holdings by 160 bp YTD.

"Mutual funds are underweight the 20 S&P 500 stocks with the highest sales exposure to China by 54 bp. These stocks have lagged the S&P 500 by 12 pp [percentage points] (-15% vs. -3%) since May 5. Underweight exposures to Semis [semiconductors] and Tech Hardware have also supported relative fund performance during the past two weeks." The PHLX Semiconductor Index (SOX) dropped by 14.3% from May 5 through May 20. Troubles for U.S. chipmakers are the subject of a report from Morgan Stanley.

Looking Ahead

The coming months also look promising for stock pickers. "A further escalation in trade tensions should continue to benefit fund returns versus their benchmarks," says Goldman. "Our economists expect that a deal will eventually be struck that leads to a 'staggered off-ramp' for existing tariffs, but believe that the likelihood of a final round of tariffs on the remaining $300 billion of imports has risen to 30%."