Stock picker futility may be back, courtesy of Apple Inc.
The iPhone maker, under-owned by the majority of actively managed funds according to Citigroup Inc., has jumped 13 per cent this month to a record, poised for its best return relative to the S&P 500 in three years. Its contribution to the benchmark gauge is almost four times greater than any other stock. At $81-billion, the increase in Apple's market cap this month alone exceeds the value of 85 per cent of the index's members.
The situation is a fresh blow to money managers who just gave signs of life in January after years of trailing the market. While sinking equity correlations have prompted strategists such as Goldman Sachs Group Inc.'s David Kostin to predict a renaissance in stock picking, Apple's surge is an example of a phenomenon some researchers see as dooming active management -- the tendency of just a few shooting-star stocks to dominate indexes.
"These active managers are making a conscious call to be under-exposed to a leading U.S. company in an effort to try to generate alpha," said Todd Rosenbluth, Director of ETF & mutual fund Research at CFRA in New York. "It's a double whammy. They're missing out on some of the gains in Apple. And what they're replacing it with may not go up."
Apple shares climbed after stronger-than-expected iPhone sales during the holiday quarter spurred optimism that the next new model will drive a resurgence in demand and help the company's services businesses grow. The stock has risen on all but three days in February.
For most equity managers, the rally may be only a brief hindrance to performance. According to Citigroup's latest quarterly survey, about a third of mutual funds held Apple among their top 10 holdings, and fewer hedge funds -- about 14 per cent.
To Michael Binger, a senior portfolio manager who helps oversee $1.4-billion at Gradient Investments LLC in Arden Hills, Minn., Apple's strength is nothing to worry about.
"We're not in the index-hugging game," he said. "If you own a 3-per-cent position in another stock that did better than Apple, you'd accomplish the same thing, or better."
For now, the pain of shunning Apple is real. Among some 300 funds that are benchmarked to the S&P 500 and have at least $500 million in assets, only a fifth hold Apple more than its representation in the index, according to latest regulatory filings compiled by Bloomberg. These funds have returned an average 4.1 per cent this month, compared with 3.1 per cent from those that have no stake.
Stock pickers had a good start of the year, fuelling optimisms that better returns may help stem an exodus of money from active to passive funds. In January, 61 per cent of actively managed equity mutual funds beat their benchmarks, the most since June 2015, according to data compiled by Morningstar Inc.
While any reversal in performance is probably bad news for stock picking, academic research shows it shouldn't come as a surprise that professional investors usually trail the market.
According to a study by Hendrik Bessembinder, a finance professor at Arizona State University who tracked returns of almost 26,000 stocks from 1926 to 2015, less than 4 per cent were responsible for all of the $31.8-trillion in wealth created by U.S. equities in the period. Of those, 86 companies generated half of the returns and Apple alone accounted for about 2 per cent.
And Apple has burned stock pickers in the past. In 2014, aversion to the iPhone maker turned out to be one of the worst blunders for money managers, who trailed benchmark indexes by the most in almost a decade as Apple rose almost four times more than the S&P 500.
For stock pickers, the pressure to deliver is higher than ever after equity mutual funds suffered the biggest outflows last year, with investor withdrawals surpassing $200-billion, data compiled by Investment Company Institute and Bloomberg show. At the same time, exchange-traded funds, a form of passive investing, saw record inflows.
"Now is the time to shine if you're trying to recapture or defend your asset base," said Mr. Rosenbluth. "It's more meaningful when investors are increasingly questioning whether to pay the extra fee" for active investing, he said.