Struggle of Mutual Fund Managers in Beating Benchmark

According to BofA Global Research, managers of mutual funds focused on large-cap stocks in the U.S. had a stronger performance in beating their benchmark last month. However, their struggle to outperform the benchmark continues throughout the year.

In October, sixty-eight percent of large-cap active managers managed to outperform their Russell 1000 benchmark, which is the highest "hit rate" in over two years. This significant achievement took place despite the U.S. stock market experiencing a decline of 2.5% in the Russell 1000 index.

Investors often opt for actively managed mutual funds, even with higher fees, in the hopes of achieving better returns than those offered by passive index funds. However, professional stock pickers have faced challenges in producing better returns than broader market-tracking indices.

This October's outperformance streak marked the third consecutive month that large-cap active managers beat their Russell 1000 benchmark — the longest streak since mid-2022. However, they tend to fall behind it on an annual basis.

The relative strength shown by large-cap active managers in October increased their hit rate for this year to 41%, surpassing the average annual hit rate of 37%, as reported by BofA. In October, the average fund outperformed the benchmark by 34 basis points.

Despite these challenges, the U.S. stock market has experienced growth in 2023, especially with the S&P 500 index finishing higher on Wednesday, extending its longest stretch of daily gains in two years. The S&P 500 has seen a rise of over 14% this year, while the Russell 1000 has gained around 13.8%.

While the stock market performs well, growth stocks have been outperforming value equities in 2023. The Russell 1000 Value index has fallen 1.4% as of Wednesday, while the Russell 1000 Growth index has soared by an impressive 30.1% during the same period.