Anything For You All: One group of traders is on pace to shatter performance records

One group of traders is on pace to shatter performance records — here's what they're buying

Amid the turbulence that's rocked the stock market this year, one group of traders is on pace for its best year on record.
Bank of America Merrill Lynch shows just how well they're doing so far in 2018, and explains which specific investment decisions have contributed to their success.

As equity investors attempt to make sense of all the cross-currents whipsawing markets right now, one group of traders can rest easy.

That would be active managers — also known as stock pickers — which make their living identifying single stocks that they believe will outperform.

And outperform they have. In April, 59% of large-cap managers beat their benchmarks, while the average fund outperformed by 18 basis points, according to Bank of America Merrill Lynch data. What's more, 60% of active managers are outpacing benchmarks on a year-to-date basis, a record high for this point in the year, based on data going back to 2009.

This chart shows their annual historical performance. As you'll note, the deepest doldrums for active managers came in 2014 and 2016. Those were years when the market climbed at least 9.5%, the type of strong performance that makes it tough for active managers to stand out from the crowd.

It's a stunning turn of events for active managers, which were left for dead as recently as last year. At that point, market volatility was locked near all-time lows, sapping the market of the price swings so crucial for stock pickers to prove their bonafides.

Not to mention the group of investors has battled back against the meteoric rise of robo-advisors and passive strategies — you know, the ones that were supposed to put them out of commission.

So how have they achieved such strong performance so far in 2018? BAML attributes it largely to sector positioning.

Holdings for large-cap managers are the most overweight towards the consumer discretionary and tech industries, which are both up more than 3% year-to-date. That makes them the top two best-performing sectors in the S&P 500 this year, and it's not particularly close.

In consumer discretionary, a large portion of the overweight position stems from exposure to Amazon (+33%) and Netflix (+60%), which have both seen shares skyrocket in 2018.

Elsewhere, stock pickers are experiencing success due to their outsized holdings in so-called growth stocks. For context, the Russell 1000 Growth index is beating the Russell 1000 Value gauge by 4.3 percentage points on a year-to-date basis, says BAML.

However, one large caveat remains: The industries and companies so responsible for the historically strong active manager returns are also the market's most crowded. That means when sentiment rolls over, a huge number of traders will be rushing for the exit simultaneously.

It's these types of pressure points that can cause serious stock-market pain. But with performance going so swimmingly at the moment, you can hardly blame stock pickers for sticking with what works. Read »