Most global fund managers failed to beat the market in the second quarter despite being “notably more bullish” than usual, according to a new report from bfinance.
Less than 30% of global fund managers beat the MSCI ACWI index over the three-month period, typically lagging the benchmark by 4.5 percentage points on average.
The index was up 2.9% over the second quarter thanks to the stellar performance of just a handful of tech stocks. These returns were even more pronounced in indices with a more concentrated exposure to the Magnificent Seven such as the S&P 500, which climbed 4% over the period – more than five times higher than the IA Global sector’s average return of 0.5%.
The report said: “With market returns being driven by an extremely narrow group of companies in comparison with historical norms, virtually any stance other than a heavy orientation towards growth and momentum has been punished.”
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Only high growth funds with bigger positions in Magnificent Seven stocks achieved a “modest” lead on the MSCI ACWI index, climbing 0.4 percentage points ahead, whereas defensive funds such as low volatility and income strategies dropped between 2.8 to 3.2 percentage points behind.
Yet fund managers were markedly more bullish over the second quarter. The bfinance Risk Aversion index stood at 4 by the end of the period, dropping from its 10-year average of 0.5.
This was most noticeable among multi-asset managers, who upped their equity allocations “considerably higher,” rising from 33% to 39% over the quarter after suffering from the “fear of missing out”.
The report added: “Investors typically hesitate to take conservative positions on equities during stock market rallies, conscious that underweights can result in material underperformance, although the exceptionally narrow drivers of recent positive equity market performance have caused concern.”
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Top-performing tech stocks may have driven markets in the second quarter, but the concentration risks associated with their dominance were also at the front of fund managers’ minds.
Almost a third (32%) of bfinance’s manager clients targeted equities in their searches over the past year (up from 19% the previous year) as they sought to diversify their allocation.
“Investors have been keenly aware of the risks posed by an increasingly concentrated stock market and are focusing on diversification in the face of apparent dysfunction,” the report added.
