Stock pickers are headed for their best year since the financial crisis

Even amid the rise of robo-investors and passive strategies, good, old-fashioned stock pickers are continuing to prove their worth.

About 54% of large cap mutual fund managers are beating their benchmarks so far in 2017, the highest-ever success rate at this time of year, according to Bank of America Merrill Lynch data going back to 2009. If they keep up the pace through the end of the quarter, it would be the first year since 2007 — right around the time of the financial crisis — that more than 50% of them outperformed benchmarks, the data show.

It’s been an impressive stretch by any measure for investors that make their living analysing company fundamentals and betting on single stocks. And it’s been a somewhat surprising development amid the rapid growth of passive investment — which often involves computerised and price-insensitive trading.

Screen Shot 2017 10 04 at 4.49.32 PMBank of America Merrill LynchPair-wise correlation amongst S&P 500 stocks is the lowest in 17 years.

At the root of the resilience has been the average pair-wise correlation of stocks in major indexes — which measures the degree to which they trade in tandem. For the benchmark S&P 500, the measure sits at the lowest since the tech bubble, while companies in the Russell 2000 gauge of small-cap stocks are trading the most independently since 2003, BAML data show.

BAML attributes active mutual fund managers’ outperformance to their being overweight the right sectors. The firm points out that those investors are 96% overweight internet and direct marketing retail stocks, relative to the S&P 500 — and that area has surged year-to-date.

It remains to be seen how well active fund managers will fare once intra-stock correlations rebound from current lows. But until then, stock pickers are making the most of their opportunity to show they still matter.

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