Many U.S. mutual fund managers
underperformed their benchmarks in February, according to a recent Bank of
America Corp. Merrill Lynch (BAML) Report. At the same time, money has been
flooding into U.S. equity funds, as these investment vehicles have drawn close
to $80 billion worth of inflows since the November election, The Financial
Times reported.
Underperforming Fund Managers
While stocks overall did very
well in February, U.S. mutual fund managers failed to enjoy the same
performance, according to the BAML report. Large-cap funds suffered the largest
performance shortfall, as only 35% of these investment vehicles outperformed their
benchmarks, compared to 52% in January. Growth managers in this space
contributed to this situation, as they generated absolute returns of 3.7%
during the month, below their benchmark of 4.2%.
Kevin Quigg, chief strategist of
ACSI funds, helped shed some light on why fund performance can change
significantly over short periods of time. "The market is reacting more
sharply than ever to shorter-term news and information," he said. This
development can cause stock values—and also the performance of investment
funds—to "whipsaw."
Mid-cap funds fared better than
their small-cap and large-cap counterparts during February, with 42% of the
funds in this particular segment surpassing their respective benchmarks,
additional figures from the BAML report showed. Within these mid-cap funds,
growth funds produced the most impressive performance, with 63% outperforming
their benchmarks.
Robust Inflows
U.S. equity funds have
enjoyed robust inflows following the November election amid optimistic
expectations surrounding President Donald Trump's proposed policies, drawing
roughly $79.4 billion worth of inflows between November 8 and roughly March 1,
according to data provided by EPFR and reported on by the FT. These inflows
have provided a sharp contrast to the sharp outflows these funds started
suffering at the beginning of 2015, a development that saw these investment
vehicles lose $230 billion altogether.
While retail investors have
pulled money from stock funds for 14 weeks in a row, institutional investors
and certain exchange-traded funds have been more than making up for these
losses, the FT reported. In addition to experiencing these sharp inflows since
the election, the U.S. stock market has seen notable gains, with the Standard
& Poor's 500 Index rising more than 10% since then, Google Finance data
reveals.
Are Stocks Overvalued?
The healthy returns that stocks have
experienced lately—along with the significant inflows this asset class has
drawn—have prompted questions as to whether stocks have become overvalued.
While the stock market has
reached an "all-time high," we might be experiencing a situation
similar to the 1990s, when technology companies helped drive the stock market
to new record levels, Holmes Osborne, principal of investment manager Osborne
Global Investors, told Investopedia. Many of these technology firms ended up
disappearing, and stocks dropped sharply once the hype had calmed down.
While corporate earnings are
robust for the time being, they will eventually "revert to the mean"
just like everything else, he said. Many companies have "exorbitant"
amounts of debt, and if earnings push lower, these corporations may be unable
to make regular payments on their debt.
In the current environment, fund
managers may be underperforming their benchmarks simply because they are
avoiding companies that are flying high and taking on lots of debt, Osborne said.
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