Let’s Get Physical

Image source: Dedi Grigoroiu - Shutterstock

What's going on?

Investors have been keeping active this year: fresh data from Bank of America on Tuesday showed May saw particularly historic levels of outperformance at “actively managed” funds.

What does this mean?

Active fund managers research and invest in individual stocks they think will shine, rather than “passively” tracking the performance of an index. That approach paid off last month: 70% of active funds focused on large US stocks outperformed the wider market – one of the highest percentages in recent history. A similarly strong showing in February means more than 60% of these funds are currently beating the market in 2021 so far.

That impressive outperformance is partly due to sluggish price rises among market-dominating tech stocks: actively managed funds typically invest more in the smaller shares that have received an outsized boost from progress on coronavirus vaccination. They also tend to prefer cheap-looking “value” stocks over “growth” stocks, which have fallen in investors’ favor this year.

Why should I care?

The bigger picture: It’ll never last.
Beating benchmarks is a big deal for most active managers: it’s how they justify fat fees from investors who could instead just passively track an index’s performance via a cheap exchange-traded fund (ETF). But investors don’t seem convinced active funds will be able to keep it up: a record $305 billion has flowed into US stock ETFs in 2021 so far, compared to $250 billion in the whole of 2020.

Zooming out: Activists matter.
An activist fund is both actively managed and aggressive in seeking change at the companies it invests in. Europe’s biggest activist investor, Cevian Capital, announced on Tuesday that it’d built a 5% stake at Aviva, and that it was pushing the British insurance giant to cut costs and distribute an additional $7 billion to shareholders – who promptly sent the stock’s price up 3%.

Originally posted as part of the Finimize daily email.

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