It might be time to give stock pickers chance
NEW YORK — Bad news keeps piling up for stock pickers, but not everyone is giving up on them.
The majority of actively managed mutual funds continue to fall short of index funds, and investors are voting with their feet, pulling out billions of dollars from those funds every month in search of cheaper and better options. Defenders of portfolio managers say the moment may be near when they prove their worth: when markets get shaky.
Trying to beat the market has long been a losing proposition.
During the last decade, investors would have been better off with an index fund that tracks the Standard & Poor's 500 than the vast majority of large-cap mutual funds run by stock pickers. Only 20 percent of actively managed large-cap funds managed to beat the index over the 10 years through June, according to S&P Dow Jones Indices. The numbers are similar for funds focusing on mid-cap stocks, small-cap stocks and other areas of the market.
The last few years have been tough for stock pickers because stimulus efforts from the Federal Reserve have lifted all stocks, says Lisa Shalett, head of investment and portfolio strategies for Morgan Stanley Wealth Management.
With the Fed's bond-buying program over and the first increase in interest rates in nearly a decade approaching, Shalett says stock pickers may be able to differentiate themselves.
Capital Group, whose American Funds is the third-largest fund family, points to how some active managers have a better history of minimizing losses during down markets. Not only does that help support the funds' long-term returns, it may help keep skittish investors from jumping out and selling low, only to miss a subsequent rebound.
“If you can moderate that swoon, if you can make it a little less painful, you increase the chance that people stay invested,” says Rob Lovelace, senior member of Capital Group's management committee.
That's why he suggests investors look not only at expenses when choosing a mutual fund, but how it performs during down markets and whether its managers invest in the fund themselves.