Active funds enjoy a great tear thanks to cash, not stock picks

Professional stock pickers are beating the market in a scale not seen in more than a decade. That’s the good part of the story. The underwhelming part: They did it by parking money in cash, instead of picking the right companies.

Roughly 50% of actively managed mutual funds are ahead of their benchmarks this year, compared with the 10-year average hit rate of 34%, according to data compiled by Goldman Sachs Group Inc. That’s their best showing since 2009.

Their secret for success was moving money to cash, which not only helped preserve capital during the bear-market rout but also increasingly offered higher yields as the Federal Reserve raised interest rates from near-zero. Mutual funds have boosted their cash holdings this year at the fastest pace since the global financial crisis, with the allocation spiking to 2.4% from a three-decade low of 1.5%.

The cash hoarding is “aiding their outperformance,” Goldman strategists including Cormac Conners wrote in a note. “However, on a pure stock selection basis, the portfolio of the average mutual fund has trailed the Russell 1000.”

But not everyone is having a stupendous year.

Funds that seek to profit from investing in companies with faster growth potential are having a hard time keeping up with the market. The average growth fund is down three percentage points more than the Russell Growth Index.

The subpar return is partly caused by their aversion to Apple Inc., the largest American company by market value that has beaten the growth benchmark by 14 percentage points this year. Apple has been a persistent underweight among active funds for years. While valuations are often cited as a reason, another explanation links it to a Securities and Exchange Commission rule that limits a fund’s ownership of a single stock.

Broadly, growth stocks have wavered this year as the rise in interest rates spurred a reset in valuations. But that hasn’t deterred some money managers from finding bargains. During the second quarter, the average mutual fund increased exposure to high-growth, high-valuation stocks, with technology and consumer discretionary shares getting the biggest boost in holdings.

As with hedge funds that make both bullish and bearish equity wagers, these long-only funds are rushing to tech megacaps such as Apple. The average mutual fund added 154 basis points of exposure to the seven largest tech stocks during the second quarter, the biggest increase since 2014. But despite the boost, they remain underweight these shares.

“Factor and sector rotations reveal a preference for growth among all mutual funds — not just those with a growth mandate,” Goldman strategists wrote. They’re “betting on growth in a down market.”

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