After noting earlier today that long short hedge funds have had negative alpha for five months in a row is more good news (if you are an active fund sadist). The first half of 2016 was the worst first half performance for active fund managers on record. According to Bank of America’s data, which goes back to 2003 large cap, active fund managers chalked up the worst first half performance against the Russell 1000 during H1 2016 than at any other point in the past 13 years.
The worst first half performance for active fund managers on record
Just 18% of large-cap funds outperformed the Russell 1000 during the first half of the year, making it the worst year of active funds so far. The average fund was up by 0.8%, lagging its benchmark by three percentage points. Crowded positions, which have been the subject of much analysis and controversy over the past few years as a number of high-profile companies have collapsed, proved to be the most damning.
The ten most crowded stocks lagged the ten most neglected during the first half by 18 percentage points, an atypically high spread according to Bank of America’s research.
The outperformance of neglected stocks compared to crowded positions is nothing new. According to the FT, which cites data from Bloomberg, between July 2015 and the beginning of May this year stocks in which hedge funds had the largest ownership percentage in the Russell 3000 index fell a 31%! A similar report from Bank of America at the beginning of 2016 also showed that the ten most crowded positions in the US equity markets underperformed the ten most neglected by about 7%. At the time this spread was also described as “atypical” and was blamed on de-risking as well as fund outflows.
Another standout trend in the first half performance data is the reversal in fortunes of activist funds. Activist campaigns, self-help via spin-offs/divestitures, buybacks and deals were rewarded by investors for most of the post-crisis era. However, these strategies are now coming under more scrutiny as investors are less impressed by catalyst driven opportunities and are more worried about the state of balance sheets. Further, the price of some deals is scaring investors away. Buyouts at high earnings multiples and buybacks executed at higher prices have led to investor caution and underperformance.
The strategies that did work during the first half of 2016 were growth and value, with value outperforming slightly. The Russell 1000 Value index beat the Russell 1000 Growth index by 1.2ppt on a total return basis in June, and by 4.0ppt in 2Q. Meanwhile, high-quality stocks outperformed low-quality equities by five percentage points during the six months to June. Defensive bond proxy sectors such as the Telecom and Utility sectors both posted double-digit returns. Financials and Tech have been the worst performers.