The late John Bogle, founder of the Vanguard Group, was a key promoter of passive investing through index funds, based on decades of research revealing that few active managers, or stock pickers, ever have been able to beat the market averages on a sustained basis. The experience of 2017 and 2018 appeared to validate his view, as a widening majority of active managers underperformed. But Jan. 2019 saw a remarkable turnaround in favor of the stock pickers, as summarized in the table below.
How Stock Pickers Are Winning in 2019
- Large cap fundamental managers beat benchmarks by 81 basis points (bps)
- Large cap quantitative managers beat benchmarks by 55 bps
Source: Wells Fargo, as reported by Barron's
Significance For Investors
The percentage of actively-managed large cap mutual funds that outperformed the S&P 500 Index (SPX) sank from 42% in 2017 to just 35% in 2018, per analysis by Bloomberg. This was despite a 50% surge in the CBOE Volatility Index (VIX) during 2018, creating an environment that theoretically should have been more hospitable for the stock pickers. That is, wider stock price fluctuations open up more possibilities for bargain hunting by savvy active managers.
Whether the experience of January represents a short-lived anomaly or a longer-lasting trend in favor of active management remains to be seen. "Mechanical investment strategies" were pretty much bound to succeed in "a remarkably long bull market that has favored momentum stocks," Barron's observes. Once that bull market ends, investors will have to become more selective, the article indicates.
Michael Wilson, the chief U.S. equity strategist at Morgan Stanley, is among those advising investors to be considerably more selective in the face of sharply declining profits for the broader market. Stocks with low valuations and several other screening criteria used by Wilson have beaten the market this year, per an earlier report.
After a long history of underperformance, one month is hardly enough to deduce a reversal of trend in favor of active managers, especially given that the market was up in January. Moreover, finding active managers who are likely to outperform in the future is no easy task. Even those with stellar track records may falter going forward. "Past performance is no guarantee of future results," as the standard disclaimer in fund prospectuses cautions investors.