Stock mutual funds having lousiest year since 1998

Only 13% of funds have beaten benchmarks so far; underperformance could lead to bigger risk-taking

Sep 2, 2011 @ 2:10 pm

Stock mutual funds are having their worst year since 1998 relative to their benchmarks, as higher volatility makes it harder to pick stocks, according to JPMorgan Chase & Co. (JPM)

Among 2,806 funds tracked by the brokerage, 47 percent underperformed their benchmarks by more than 2.5 percentage points this year, the most since the 55 percent recorded in 1998. Only 13 percent of the funds beat the market by the same margin. The underperformance accelerated last month, with the proportion of trailing funds almost doubling from July, according to JPMorgan data.

U.S. stock price swings widened at the fastest rate since the 1987 crash in the month through Aug. 23 as investors weighed stalling economic growth against the prospect of additional stimulus from the Federal Reserve. The volatility helped drive August options volume to a record 550.1 million contracts on demand for a hedge against equity losses, according to the Chicago-based Options Industry Council.

“The turbulence of markets in August caused a rapid deterioration of active manager performance,” Thomas J. Lee, JPMorgan's chief U.S. equity strategist, wrote in the report dated yesterday.

The Standard & Poor's 500 Index plunged 6.7 percent on Aug. 8, before surging 4.7 percent, dropping 4.4 percent and jumping 4.6 percent in the next three days. The benchmark gauge fell as much as 2.3 percent today as a government report showing employment stagnated stoked concern the economy may fall into a recession.

High-Beta Preference

The trailing funds are likely to increase holdings in companies that move the most relative to the benchmark, known as high-beta stocks, to boost performance, Lee said. That preference may result in a year-end rally, he said.

Since 1995, there had been nine years when more funds trailed than those that beat from Jan. 1 through Aug. 31. The market rallied in the last four months of a year in all but 2008, with the S&P 500 rising 8.5 percent on average, JPMorgan data showed.

“When active managers trail, there is a tendency for markets to rise into” the end of the year, Lee wrote. “Intuitively, when there are more trailing, there will be logically an attempt to outperform, which should be driven by risk-taking.”

--Bloomberg News--

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want their 2017 bonuses.

Maryland jumps into fiduciary fray with legislation requiring brokers to act in best interests of clients

Legislation requires brokers to act in the best interests of clients.

8 apps advisers love for getting stuff done

Smartphone apps that advisers are using in 2018 to run their business more efficiently.

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print