Challenges in 2024 Highlight Poor Performance of Active Funds

Overview of Active Fund Performances in 2024

In 2024, active fund managers encountered significant challenges, reflecting a tumultuous investment landscape. According to a recent analysis, the Mid Growth funds experienced the roughest year since 2009, underperforming by more than 600 basis points (bps). This assessment, derived from 13F filings, underscores the difficulties faced by active investment strategies during this period.

Comparative Performance of Different Fund Types

As fund performance varied widely, Mid Core funds recorded their lowest performance since 2020, trailing by over 300 bps, while Large Growth funds also faced pressures, underperforming by 312 bps. However, amidst these challenges, there were bright spots; notably, Small Value funds showed resilience and outperformed their benchmarks. Furthermore, Large Value funds consistently beat the Russell 1000 Value Index (R1V) for the fourth year in a row, showcasing a trend of relative strength in value investing.

Key Trends Influencing Fund Performance

A striking characteristic of 2024's investment climate was the concentration of returns within growth indexes. A mere handful of stocks contributed substantially to performance gains. The top 10 stocks in the Russell 2000 Growth Index (R2G) were responsible for a remarkable 45% of its total gains. Even more concerning, in the Russell Midcap Growth Index (RMG) and the Russell 1000 Growth Index (R1G), this concentration reached 58% and 77%, respectively, emphasizing the risks associated with such dependence on a limited number of equities.

Investment Strategy Adjustments by Fund Managers

The report also revealed significant shifts in the investment approaches of managers across various capitalization categories. Small Core and Growth fund managers increased their relative sizes compared to their benchmarks. Despite these strategies, Jefferies recommended that managers reconsider and reduce their weighted-average market capitalizations to better align with evolving market dynamics.

Sector Weightings Adjustments

Entering the last quarter, Small Core funds exhibited an overweight position in Consumer Discretionary, while remaining underweight in Health Care, with a noticeable focus on Biotech. Conversely, Small Growth managers adapted by adopting a marginal overweight in Utilities, the first instance since March 2022. These tactical shifts indicate a responsive strategy to the prevailing market conditions.

Mid and Large Cap Funds' Strategic Changes

Managers in the Mid Core category made strategic adjustments as well, favoring Technology and Utilities while underweighting Consumer Staples. In the Mid Growth segment, managers notably increased their underweight position in Technology, a factor potentially impacting their overall performance. They did, however, boost their investment weight in Health Care.

In the Mid Value space, managers shifted their portfolios by trimming down on Staples and Health Care, redirecting their focus toward Financials and Industrials. Large cap funds made more measured adjustments, with Large Core funds noted for their significant overweight in Health Care and Communication Services. Notably, Large Growth funds entered the fourth quarter with a substantial underweight in Technology, while Large Value funds slightly decreased their overweight in this sector yet maintained a 7.4% overweight, marking the most significant underweight position seen in Industrials thus far.

Conclusion

The analysis illustrates that 2024 has created an exceptionally challenging environment for active fund managers. While some sectors and funds have demonstrated resilience, a focus on concentrated returns has raised red flags for investors. It remains to be seen how these trends will influence decision-making as fund managers continue to navigate a shifting market landscape.

Frequently Asked Questions

What were the main findings of the report from Jefferies?

The report indicated that Mid Growth funds faced their worst year since 2009, with various fund types showing significant underperformance compared to benchmarks.

Which funds outperformed in 2024?

Small Value funds and Large Value funds consistently outperformed their respective benchmarks throughout the year.

What trend was observed in the growth indices?

A concentration of returns was noted, with a small number of stocks driving a significant portion of performance gains across several growth indexes.

How did investment strategies change among fund managers?

Fund managers adapted their strategies by increasing positions in certain sectors like Technology and Financials while reducing others such as Health Care.

What sectors were favored by different fund categories?

Small Core funds favored Consumer Discretionary, while Mid Core funds leaned toward Technology, indicating a strategic response to market changes.

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