Stock pickers struggling to beat the market

The rally in late 2020 by smaller and cheaper stocks coupled with the mem-stock craze that began in January raised hopes that active investing would make a comeback this year. But as 2021 draws to a close, most professional stock pickers find themselves in familiar territory: trailing the benchmark S&P 500 index.

Craig Lazara, managing director of the S&P Dow Jones Index, said that while many money managers were full of optimism in January, this is nothing new. “Every year, there are usually a bunch of forecasts from active managers that explain why this year is going to be a good year – it will be a stock picker’s market,” Mr. Lazara said.

But many active stock funds struggle to beat the market in a given year, and 2021 fits the pattern. According to Morningstar Direct, approximately 85% of active US stock funds were on pace to underperform the S&P 500 as of November 30 this year. In the same period a year ago, 64% of such funds were trailing the S&P 500, according to Morningstar.

Morningstar strategist Robbie Grangeold said some of those funds focus on small- or mid-sized companies, and many were on track to outperform benchmark indexes that more closely resembled their investing style. Small-cap funds, in particular, have had a strong year relative to their benchmark.

However, keeping pace with the S&P 500 was a different matter.

“Large-cap stocks have generally outperformed small-caps this year,” Mr Greengold said.

Active managers had reason to believe this year could be different. In fact, the US economy’s recovery from the coronavirus slowdown had prompted investors to close down on stocks they had previously overlooked, Mr. Lazara said. They went looking for bargains, arguing that most companies would benefit from the growth of the economy — not just the companies that proved most resilient in the first year.

According to the S&P Dow Jones Index, cheap stocks, small-cap and energy companies—categories that lagged behind the S&P 500 at the start of the health crisis—declined the index’s performance in 2020.

His moment did not last. By the spring of 2021, big growth stocks have gained their footing and kept at it — helping the S&P 500 gain 28% so far this year. The S&P Midcap 400 is up 23%, while the S&P Smallcap 600 is up 26%.

This story has been published without modification in text from a wire agency feed