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Stock picking is making a comeback in 2012 as global macroeconomic concerns dissipate and the Federal Reserve hints at removing liquidity, causing stocks to rise or fall on their own merits again and not as one giant, correlated basket as they did during the financial crisis and its aftermath.Since the start of the year, 63 per cent of fund managers are beating the S&P 500 [.SPX], up from just 26 per cent over the last 12 months, according to a report from Bank of America Merrill Lynch. Even more impressive, 95 per cent of growth fund managers are beating the S&P 500 over the last three months.
“Stock picking paid in 1Q,” wrote Savita Subramanian, chief equity and quant strategist for the firm in a note to clients Tuesday. “While fund managers in 2011 were likely hurt by record-high correlations in the second half, correlations have since dropped dramatically, remaining at low levels throughout the first quarter of this year. In general, when correlations abate and stocks are more differentiated, active stock selection strategies may start to add more alpha.”
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Stocks in the S&P 500 trade in tandem only 30 per cent of the time on any given day, compared to more than 70 per cent of the time at the height of the lockstep pattern last year. It’s helped that the Federal Reserve – most recently yesterday in the release of its March meeting minutes – has signaled that its quantitative easing programs may not be extended.
“The rising tide lifting all stocks is ebbing making this a great environment for stock picking,” said Stephen Weiss of Short Hills Capital. “To paraphrase the (Fed) statement: the economy is recovering but we’re going to keep rates low until the end of 2014. Instead of driving the markets lower, investors should do a hosanna, take a breath and start picking stocks – not any stocks, but those more dependent on the U.S. economy.”
The technology sector [XLK] is the second-best performer in the S&P 500 this year behind beaten-down financials [XLF], thanks in great part to the 50 per cent-plus surge in Apple shares [AAPL]. That’s likely the reason for the impressive track record for funds focused on so-called growth stocks.
To be sure, value-focused managers have fared not nearly as well, according to Bank of America, with only 28 per cent beating the S&P 500 so far this year.
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