Active Managers Get Caught With Too Much Money in Growth Stocks

The reopening rally, billed as a blessing for stock pickers, has failed to match hopes, at least as of yet. For many funds it made November another painful one when it came to competing with benchmarks.

Blame it on habits formed earlier in the year, when white-hot gains in tech megacaps and virtually nothing else chased managers into an ever-shrinking subset of growth companies. While the broadening stock-market gains of November may one day provide more fertile ground for picking stocks, right now fundamental managers are struggling.

As good news on vaccines fueled a rotation out of tech, their leadership was supplanted by energy and financial shares, both of which have been shunned by money managers despite trading cheaply to earnings, Bank of America Corp. data shows. As a result, only 14% of large-cap core funds beat the Russell 1000 Index in November, the third-lowest hit rate in any month going back to 1991, according to data compiled by BofA.

“It was just a couple of weeks ago that every asset manager and portfolio manager that found their way to a microphone was saying tech is the winner, Covid is an influence that is going to be compelling and long lasting,” Scott Knapp, chief market strategist of CUNA Mutual Group. “Then along comes the vaccine. A lot of that groupthink means a large portion of the funds were tilted in the wrong direction as the rotation was taking place.”

The pattern played out Wednesday, a day when the S&P 500 rose about 0.2% while financial firms gained 1% and energy producers surged 3%.