Mutual fund trends: Stock pickers are banking on bank stocks
By themselves, neither is very popular. But together, perhaps, they can win some fans?
Stock-picking mutual funds, which investors have been fleeing, are increasingly bulking up on bank stocks in hope of beating index funds and luring back dollars.
That, plus other trends from around the mutual-fund industry:
Banking on banks
Actively managed mutual funds are struggling. Most have fallen short of the Standard & Poor’s 500 index for years, and the reason to pay their higher fees is for the chance to beat index funds. Only 27 percent of large-cap core mutual funds beat the S&P 500 this year, as of Dec. 9.
To improve their returns and lure investors back, stock pickers are increasingly betting on stocks of banks and insurers. Large-cap core mutual funds have an average of 17.8 percent of their portfolios invested in financial stocks, according to a review by Goldman Sachs. That’s 1.65 percentage points more than S&P 500 index funds have.
That may not sound like a big difference, but it’s the sector where active managers most differ from index funds, by far. The next-biggest “overweight” by actively managed funds is in the industrial sector. Managers have 0.68 percentage points more of their portfolios there than index funds do.
The emphasis on banks is part of a broader approach to take advantage of rising interest rates, now that the Federal Reserve has raised short-term rates for the first time in nearly a decade. The Fed’s move earlier this month, and expectations for more increases, give banks cover to charge more for credit cards, auto loans and other products, which should help their profits. Higher rates should also help insurers, allowing their vast bond holdings to produce more income.
At the same time, fund managers have also lightened up on stocks that, conventional wisdom says, would be hurt by rising rates. They own fewer real-estate investment trusts, utilities and telecoms than index funds do, for example. These kinds of stocks pay high dividends, and the thought is demand for them will drop as income investors gravitate back to bonds.
Doing good and doing well
Actively managed mutual funds have been hemorrhaging dollars generally, but one niche within stock picking has remained consistently popular.
Socially responsible mutual funds have drawn more investment dollars than they’ve lost in every 12-month period going back to late 2013, according to Morningstar. They attracted $2 billion in net investment over the year through November, for example. That’s in stark contrast to the $163 billion that actively managed U.S. stock funds lost as a group over the same time.
Investors like that these socially conscious funds consider whether companies are helping or hurting the environment, promoting good corporate governance or reducing income inequality. These factors could ultimately help protect or hurt companies’ profits over the long term, proponents say.
“Our numbers show that sustainable investing has become part of the mainstream,” said Lisa Woll, chief executive of the Forum for Sustainable and Responsible Investment, which also goes by the name US SIF. Hundreds of funds incorporate environmental, social or governance factors in their investment strategies, US SIF has a list of them on its website.
Falling 401(k) fees
When it comes to investing for retirement, you don’t necessarily get what you pay for. You keep what you don’t pay for.
High expenses can erode a nest egg, particularly over the decades that a worker is saving. And expenses can quickly add up. Mutual funds charge expenses to pay for their managers’ salaries. Plan providers also charge fees to cover record-keeping, accounting and the cost of sending those letters to you in the mail that you just throw out.
The good news is that overall expenses are on the decline across 401(k) plans, according to a review by the Investment Company Institute and BrightScope.
The average worker was in a 401(k) account where $58 of every $10,000 invested went to cover fees in 2013, according to the review’s most recent data. That’s down from $65 in 2009.
Workers in the biggest plans tend to have the lowest fees. Part of that’s because workers in larger plans tend to invest more in index funds, which have lower fees than actively managed funds. But larger plans are also able to spread out their administrative costs over a greater number of workers.