Along with the return of market volatility, 2018 may also be the year that active management makes its comeback as stock pickers continue to experience an increased success rate from last year.
In 2017, 43% of active managers beat their benchmarks, up from 26% in 2016, according to the latest Morningstar active/passive barometer report, which examines 3,600 active and passive US funds that account for about $11.1 trillion in assets.
Within the 12 categories of active funds that Morningstar studied, 11 of them showed improved success rate.
Small-cap managers in the small blend, small growth and small value categories in particular made the biggest jump, with 48% of them beating their benchmarks last year, compared to a 29% success rate in 2016.
Active value managers also saw upticks in their short-term performance, with large-, mid-, and small-cap value managers experiencing a trailing one-year success rates of 15.0%, 20.2% and 34.2%, respectively.
Active intermediate bond funds were the only ones to have experienced a drop in performance in 2017, with 61.4% of managers beating their benchmarks compared to 74.8% in 2016. Despite the short-term decline, active managers in this category have enjoyed good performance in the longer-term due to a sustained rally in both investment-grade and below-investment-grade credits, according to Morningstar.
Wells Fargo Investment Institute also tipped 2018 to be a good year for active managers at the end of 2017. The research unit of Wells Fargo, headed by president Darrell Cronk, particular highlighted opportunities for value investors, small cap managers and those running long/short strategies.
Cronk and a number of colleagues within the institute said at a press meeting in New York at the end of last year that active managers would have further opportunities to beat their benchmarks in 2018 due to a number of factors, including: the winding down of quantitative easing, the impact of the Republican tax plan, the return of volatility, and lower correlations between asset classes and sectors.
All forecasts aside, active managers are indeed on track to outpeform in 2018 so far. Year-to-date, 63% of mutual funds are beating their benchmarks, which marks the highest hit rate since 2009, according to a BofA Merrill Lynch global research report on March 2.
However, the Bank of America report also suggests a tougher backdrop ahead for stock picking as a result of the volatility spike in early February.
'Following last month's 10% pullback and volatility spike, the average pairwise correlation of S&P 500 stocks bounced off its 17-year lows (9% in December) and came in above the long-term average,' said the report. 'Higher correlations and low performance dispersion are generally headwinds to active managers' stock-picking.'
While active managers have enjoyed better short-term performance, Morningstar said that investors would benefit from favoring low-cost funds, which succeeded far more than high-cost funds in the long term.
‘Though 2017 marked a clear near-term improvement in active managers’ success rates, in general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons,’ wrote Ben Johnson, director of global ETF research at Morningstar in the report.