Professional stock pickers who feasted on last year's volatility were positioned for more of the same heading into 2023. They got something else entirely, and are paying for it in their returns.
Only one in three actively managed mutual funds was ahead of equity benchmarks during the first quarter, the worst performance since the end of 2020, data compiled by Bank of America Corp. show. That contrasts with a hit rate of 47% in 2022 that was the best in five years.
Most active funds suffered as their tilt toward banks backfired following the collapse of multiple regional lenders and the pool of winning stocks shrunk amid an increasingly top-heavy market.
Adding to the misfortune was a cautious positioning that proved ill-timed for a surprise equity advance.
"Sentiment was bearish heading into the year, leaving active funds potentially caught off guard by the market rally," BofA strategists including Savita Subramanian wrote in a note.
Cash has become one of Wall Street's favored hedging tools after 2022's bear market.
In the latest Bank of America Corp. survey of money managers, cash levels held above 5% for 15 straight months, the longest run since 2002.
While cash yielding 5% a year is not trivial, it fell short of the 7% gain in the first quarter from the benchmark S&P 500.
To be sure, even the most successful stock pickers trail the market from time to time, and all the caution may end up being prescient given the ominous backdrop facing risky assets, from monetary tightening to earnings downgrades and elevated equity valuations.
Yet the lousy start for active management is a departure from last year, when stock pickers managed to shine during the market selloff. Any further underperformance would weaken their position in an uphill battle against the rise of passive investing.
