That’s a problem for active managers who are known to overweight the cohort. The correlation between the outperformance of small caps and the excess returns of active managers has only risen further since the global financial crisis, according to an analysis by Sanford C. Bernstein.
“Given the unprecedentedly abrupt nature of the drop in revenues, it is likely that more small caps will not survive than would be the case in a ‘normal’ recession,” the Bernstein analysts wrote. “The skew to mega cap returns means that managers need to be ever more concentrated in order to outperform.”
The dominance of mega caps is another fly in the ointment. As their stellar returns make the market more concentrated -- just pull up a chart of Amazon.com Inc. or Apple Inc. for evidence -- it’s become hard for stock pickers to have sufficiently large wagers to beat their benchmarks, strategists Alla Harmsworth and Harjaspreet Mand suggested in a note last Friday.
Another challenge for active managers lurks in the underbelly of the stock market beloved by quants.
Factors -- the characteristics of shares tracked by systematic funds -- are driving the largest portion of the S&P 500’s returns in about a decade, Evercore ISI’s calculations show. That suggests that a fund manager picking stocks by slicing and dicing the corporate earnings trends might find their skills overwhelmed by broader forces like a global rush for havens.
Of course, individual managers correctly positioned for market turns have notched stellar returns from the turmoil. And one bull case holds that as easing credit stresses alleviate immediate anxiety over bankruptcies, investors can re-focus on the basics of stock-picking.
Over at London and Capital, Jones’s team tries to take advantage of sell-offs by scooping up stocks with longer-term appeal. But when it comes to a once-in-a-generation pandemic, some humility is in order.
“What confidence do I have in my views? It’s probably not great in terms of all the moving parts in the economy,” he said.
This article was provided by Bloomberg News.