Active U.S. equity funds returned an average of 7 percent through May, compared with a gain of 3 percent for the index, a benchmark of the largest U.S. companies. The gap is the biggest since 1983, when funds beat the market by 4.3 percentage points in the first five months, according to Morningstar Inc.
“We’ve been through a period of extraordinary volatility, and that creates opportunities for managers to find mispricings,” said David Kelly, chief market strategist for New York-based JPMorgan Funds, a unit of JPMorgan Chase & Co. that oversees $438 billion.
The agreement last week by New York-based BlackRock Inc. to acquire Barclays Global Investors for a record $13.5 billion put renewed focus on the long-running debate over whether active or index funds produce better returns for investors. San Francisco- based BGI, the world’s biggest money manager, oversees $1.5 trillion, with more than 70 percent in accounts pegged to indexes, including exchange-traded funds.
Diversified U.S. equity index funds declined 38 percent in 2008, less than their active peers, which fell 39 percent. That helped persuade more investors to move to passive investing.
Investors withdrew about a net $230 billion from all U.S. stock and bond funds in 2008, while putting $34 billion into index mutual funds, according to the Investment Company Institute, a Washington-based trade group. Exchange-traded funds, which also follow indexes and trade throughout the day like stocks, added $177 billion through new sales.
Jeff Tjornehoj, a Denver-based senior research analyst at Lipper, said active managers benefited this year from holdings of mid-capitalization companies, those with market values from $3.5 billion to $9 billion.
Tjornehoj said active funds hold a smaller proportion of the largest 100 companies, as measured by market value, than represented in the S&P 500 and a greater amount of the bottom 300. Every company in the lower 300 has a market value of less than $9.8 billion, said Howard Silverblatt, senior index analyst at Standard & Poor’s in New York.
Stocks in the bottom 60 percent of the index rose 12 percent through June 7, Lipper found. Stocks in the top 20 percent lost 4.79 percent.
Sun Micro, the Santa Clara, California-based software maker that agreed in April to be acquired by Oracle Corp., more than doubled in that period. Cayman Islands-based Seagate, the world’s largest maker of hard-disk drives, rose 99 percent.
Active managers own more technology stocks and fewer utility shares than represented by the S&P 500, Tjornehoj said. Information technology stocks rose 19 percent through May, making them the best-performing group in the market benchmark, Bloomberg data show. Utilities lost 8.74 percent, the worst performance among the 10 industry groups in the index.
John Schonberg, lead portfolio manager of the $592 million RiverSource Mid Cap Growth Fund, rode technology to a 39 percent gain this year, tops among mid-cap growth funds, according to Chicago-based Morningstar.
“Last year, a lot of tech stocks were selling at extremes we haven’t seen since the tech bubble crashed,” Schonberg said in a telephone interview from Minneapolis.
Schonberg’s fund had 34 percent of its assets in software and hardware stocks at the end of March, according to Morningstar. The fund’s largest holdings include Tibco Software Inc., a Palo Alto, California software firm, PMC-Sierra Inc., a Santa California, maker of semiconductors, and Ciena Corp., a Linthicum, Maryland, producer of gear for communications.
Michael Marzolf, a portfolio manager on the fund, said mid- cap stocks have gained with signs of recovery in financial markets. The S&P 400 Mid-Cap Index rose 11 percent this year through June 12, while the S&P 500 Index rose 4.8 percent.
“When fear is increasing, people move up the capitalization scale,” he said. “When fear wanes, people will move down the scale and take more risk.”