Tuesday, November 26, 2013

Active Stock Selection Outperforming

Year to date, the S&P 500 Index is up over 26%. Investors have enjoyed a strong rally with this calendar year nearing an end. If an investor has been invested in the equity market from the beginning of the year, in total, losing money would have been difficult. How does one beat a market that has run so much? Pick the right stocks.

In today's market, it has increasingly paid to be a stock picker as opposed to indexing ones portfolio. Beating the market is certainly not an easy task in today’s technologically driven market. However, 57% of actively managed funds are beating their respective benchmarks in 2013. This is a strong performance versus the historical norm of 37% of managed funds outperforming their benchmark. Typically, a stock picker's market begins to unfold in an extended bullish environment where the market starts to distinguish between stocks within sectors that will continue to drive the market higher and those that will lag. This has begun to occur with the close of the third quarter earnings season.

An additional form of evidence for a stock picker's market comes from looking at the percentage of S&P 500 stocks trading above their 200 day moving average. This indicator is one of many measures providing an indication of the overall health of the market. The higher the percentage, the healthier the market. A stock is said to be in an uptrend once it begins to trade above its 200 day. The chart below illustrates the percentage of stocks in the S&P 500 trading above their 200 day moving average year to date.

11 26 2013 200 day

As the chart shows, since mid-May, this measure has dropped from 94% to 82.40%. While it is easy to make the case of weakening in the “broader” market, one can also view this as a healthy re-balancing or rotation into other stocks. Stocks remain in uptrends as noted in our article posted Saturday and there seems to be plenty of opportunities for longs. An interesting observation is the S&P 500 has still managed to deliver new highs although the percentage of stocks trading above their 200-day moving average has decreased. From a cautionary perspective, this decrease in the number of stocks trading above their 200 day M.A. can be a signal the market is losing some momentum. So far this year though, active investors have broadly generated better returns than their passive ones.


Unknown said...

< So far this year though, active investors have broadly generated better returns than their passive ones.

It really hurts to read such a nonsense from a company like yours. This is mathematically simply not possible! ( should be Investment 101 !) Capital weighted, as a group active investors NEVER can outperform passive investors. Passive Investors get their benchmark- return and active investors play a zero-sum game ( minus fees, commissions etc. ). There simply is no way to outperform the benchmark as W.Sharpe demonstrated decades ago in one of his papers. It is possible that more than 50% of active funds beat the benchmark, but this only means that these are the smaller active funds whith less AUM. As a group and considering cost they will lag the benchmark in ANY time period.

Matt Antenucci said...

I appreciate your comment. The focus of this post was on a year to date basis rather than long-term. In the near-term, I intend to write an additional post discussing active and passive management.

David G said...

"The focus of this post was on a year to date basis rather than long-term."
Time doesn't matter. From fractions of a second to infinity, alpha is ALWAYS a zero sum game.