Bull market leaves these stock fund categories behind

What could possibly be bad about being a stock fund manager during a honking big bull market? Watching on the sidelines while everyone else makes money. And there are a remarkable number of managers doing just that.

We’re not just talking about terrible managers, although those are always a problem. A number of highly respectable mutual funds and exchange-traded funds have failed to come close to the 11.5% gain the Standard & Poor’s 500 stock index has racked up this year.

How many? Just considering the diversified U.S. categories — which eliminates sector funds and leveraged funds — 598 funds haven’t been able to crack a 5% return this year. Some of these include perennially snake-bit funds such as American Growth Fund Series Two (AMREX), which has managed to avoid the bull market entirely. It has lost 3.09% a year the past five years.

But others are eminently respectable funds like iShares Core S&P Mid-Cap ETF (IJH), up 4.56% this year, Ariel (ARGFX), up 2.16%, and DFA Small-Cap Value (DFSVX), down 4.77%. What has gone wrong? Three things:

• De-FAANGed. By far, the market’s favorites have been large-company social media and e-commerce stocks, such as the FAANG stocks: Facebook, Apple, Amazon, Netflix and Google, up an average 35% this year. But if you’re a value fund manager or a small- or mid-cap manager you probably don’t even know the ticker for these stocks — and if you did, you wouldn’t be able to buy them.

• Outsized. Large-company stocks have outperformed this year, in part because the falling dollar and rising international earnings have aided large U.S. multinational companies. “The weaker dollar doesn’t help small, U.S.-centric companies,” said Charles Bobrinskoy, vice chairman and head of the investment group at Ariel Investments.

• Undervalued. Investment styles go in and out of vogue on Wall Street, and right now value in general is out of style. The average large-company value fund, for example, has gained 5.65% this year, versus 17.69% for the average large-company growth fund. In 2016, the reverse was true: Small-cap stocks shot up 21.61% and large-company stocks gained 11.96%.

Thanks to the 2016 run-up in small-cap stocks, it’s still hard for value managers to find stocks that are cheap enough to suit them.

“It’s a little better today than it was a year ago, but it’s still challenging,” Mr. Bobrinskoy said.

Some funds, such as Longleaf Partners Small-Cap (LLSCX), are carrying big chunks of cash. Longleaf, for example, has a 27.6% cash stake, while Invesco Dividend Diversified A (LCEASX) has 15.74% of its assets in cash.

Most academic studies show that a value approach works well over time. But that doesn’t mean it works all the time. Growth funds usually soar when there are changes in the economy that people think are structural — the advent of personal computers, for example, or cell phones or e-commerce.

“Value does well when people think the world is stable, and that what has done well in the past will continue to do so,” Mr. Bobrinskoy said. “I believe that the world reverts to the mean.”