Stocks are stuck in the worst rut since 2006 and active funds are haemorrhaging assets. Yet signs of a thaw are gathering.
Among them is a data that show lockstep moves in stocks are loosening, a welcome sign to fund managers whose efforts to pick winners have been thwarted for years as shares swung in unison. Equity correlations have eased to a three-year low on US exchanges, aided by a rally in economically sensitive banks and software makers and a selloff in defensive industries.
To bulls, a stock market that is suddenly making distinctions between winners and losers is just the thing to draw in cash that by some measures is the highest in 15 years among investment funds. Money will be unleashed after the presidential race is decided, they say, with managers eager to keep momentum up after their best quarter of the bull market.
“Holding extra cash in case of a surprise seems more prudent to a lot of managers,” Michael Ball, president and lead portfolio manager of Colorado-based Weatherstone Capital Management, which oversees about $500mn. “Once that’s done, they’re likely to go back to their favorite companies and sectors. That will be the primary focus as they try to make gains going into year-end.”
The reputation of stock-picking managers has taken a beating in 2016, capped by news Friday that seven top asset managers reported a total of $50bn in quarterly withdrawals, most of it from active funds. A measure of redemption may be possible in the months after the election, a period when the S&P 500 has risen an average of 0.6%.
Between the presidential politics, interest-rate handicapping by Federal Reserve officials and earnings season, no signal has been strong enough to jar US stocks out of their tightest trading range in a decade. Over the period since July 8, the S&P 500 Index has swung back and forth within a 64-point range, at one point alternating between gains and losses for nine straight days. But while the benchmark gauge churns, stocks within it have gotten more lively. A measure of 30-day realised correlation among S&P 500 constituents has eased 34% since reaching a four-year high in October 2015, according to data compiled by Bloomberg.
Active managers have reaped benefits. According to Bank of America Corp, the proportion of large-cap funds beating their benchmarks reached 58% in the third quarter, compared with 18% in first six months. That marked the best period since the second quarter of 2015, and the second-best since the start of 2009.
Among growth funds, 71% exceeded returns on the  Russell 1000 Growth Index, while 63% of value investors beat their benchmark. It was the most since 2013 for both groups.
“We’re already seeing more stock-picking,” Peter Jankovskis, who helps oversee $1.9bn as co-chief investment officer of Lisle, Illinois-based Oakbrook Investments, said by phone. “Right now, people aren’t foreseeing upsetting macro events, which are often what cause high correlation within stocks. People are feeling free to look at stocks on an individual basis, rather than investing based on broad economic or style factors.”
The improvement has come at a time when equity bullishness among individuals is in short supply. Almost $100bn has been yanked from mutual and exchange-traded funds tracking US stocks since January, an almost unprecedented rate. Perhaps reflecting the possibility of more withdrawals, cash balances at money managers are the highest since 2001.
Fund managers are currently holding 5.8% of their portfolios in cash, the most since the period after the September 11, 2001 attacks, according to a survey conducted by Bank of America Corp. The level was matched in July after the UK voted to leave the European Union.
“After we get through the election, there will be less uncertainty, which lends confidence to investors who at that point will be seeking returns after some time on the sideline,” Richard Sichel, chief investment officer at Philadelphia Trust Co, which oversees $2bn, said by phone. “Having cash out there can definitely be positive for the market.”
An S&P 500 rally would match Wall Street expectations. The median forecast of 19 strategists sees the index finishing 2016 at 2,175, a 2.2% gain from Friday’s close. The most bullish forecaster is Thomas Lee of Fundstrat Global Advisors, who foresees the S&P 500 ending the year at 2,325, a 9.3% climb from current levels.