Q1 Large-Cap Fund Performance Worst in 18 Years: Merrill

Analysis of mutual fund performance finds that less than one in five large-cap mutual funds outperformed the S&P 500 in the first quarter in 2016.

This represents “the lowest quarterly hit rate in our data history spanning 1998 to today,” according to a Bank of America Merrill Lynch report released Monday.

“The average fund lagged by 1.9 [percentage points], marking a record spread of underperformance,” explained equity and quantitative strategist Savita Subramanian and colleagues at Merrill. “And growth funds, for which our data extends further back, saw a 6% hit rate, the worst since at least 1991, with the average fund lagging by the widest margin we have recorded in our quarterly data: -3.5 [percentage points].”

Value managers had a better hit rate, the report says, with 19.6% topping their respective index for the quarter. Plus, 29% of core funds did so.

March results, though, “were the worst in a string of months,” the report adds. Large-cap managers’ hit rates for topping the index dropped from 34% in January to 27% in February and then 21% in March.

What’s the Problem?

The Merrill strategists point to a few factors that appear to be contributing to fund managers’ “recipe for distress.”

“Heightened correlations … and low alpha opportunity … continued to hurt, as stock selection thrives when intra-stock correlations are low and alpha is abundant,” they explained.

However, it’s also true that these contributors to underperformance have been around “for a while.”

Instead, the report authors believe “the lit match taken to active returns last quarter was likely the massive reversal – by the market, by sectors, by styles and by stocks – occurring within the quarter.”

First, momentum investors found that “almost nothing worked during both halves of the quarter except valuation,” according to the report authors.