Active Managers Stage a Comeback
With more active funds outperforming, some asset managers are optimistic the resurgence will slow the flow of money into index-tracking funds
Bill Miller is on a winning streak again.
His $1.4 billion Miller Opportunity Trust is up 7.5% so far this year and has climbed 21% in the past 12 months, according to Morningstar. Its performance this past year has been helped in part by its holdings of bank stocks including Bank of America Corp. and J.P. Morgan Chase & Co.
Mr. Miller isn’t alone: Some 45% of all U.S.-based actively managed stock, bond and other mutual funds were beating their benchmark indexes as of Feb. 28, Morningstar said.
Helping these managers is a market rally that has rewarded bets on companies expected to benefit the most from a strengthening economy. The Trump administration’s promises of lower taxes and fewer regulations have helped lift business confidence and pushed stocks higher.
Some investors are optimistic that conditions are right for active managers’ resurgence to continue, eventually slowing the flow of money out of actively managed funds into lower-cost index-tracking funds, a trend that has hounded many of them in recent years.
“Active managers are getting a little more confidence, and maybe reaching out a bit more,” said Mr. Miller, a former star manager atLegg Mason who posted an unparalleled 15-year winning streak against the market that ended in 2006.
To be sure, the rally does little to make up a lengthy stretch of underperformance for these money managers. The last year even half of all active funds beat their benchmarks was 2009, according to Morningstar. In 2016, 31% of actively managed funds beat their benchmarks.
But the recent rebound has helped. Actively managed mutual funds in February posted their first month of positive net inflows since April 2015, according to Morningstar. Those were helped by money flowing into bond funds as well as international stock funds.
While investors continued to pull money from actively managed U.S. stock funds, the type of funds hardest hit by the growing popularity of passive investing, they withdrew less in February than in any month since September 2015. So far in 2017, 45% of actively managed U.S. stock funds have beaten their index.
In the recent pocket of outperformance for active funds, funds that pick stocks in a specific industry have led the pack, with more than half ahead of their benchmarks. Bond funds also have done well, with 54% beating their benchmarks.
“It’s to be determined if this is the dawn of a new era or not, but the odds that it might be are the highest they’ve been since the financial crisis,” said Rob Sharps, co-head of global equity at T. Rowe Price Group Inc.
Mr. Sharps attributes the rebound to a combination of the Federal Reserve’s moves to raise interest rates after a long period of monetary easing, a new presidential administration and diminishing correlations between asset classes.
The change of fortunes is a welcome respite for active managers whose struggles to beat the market in recent years have resulted in fee pressure, fund closings, business overhauls and even mergers.
“The last five to seven years have been very difficult markets for active managers, and especially growth managers,” said Dan Chung, chief executive and chief investment officer at Fred Alger Management, which oversees $20 billion.
“Confidence was due to come back,” Mr. Chung said.
Other managers aren’t counting on a sustained recovery, with some continuing to overhaul their product lineups, fees and business units in a bid to adapt to the continuing competitive pressure.BlackRock Inc., the world’s largest money manager, unveiled an overhaul of its active equity unit that includes a greater focus on quantitative, computer-driven investing, layoffs of active managers, fee cuts, and research improvements.
AllianceBernstein LP recently secured regulatory approval to launch a set of funds that only charge fees when they fare better than their benchmarks. The new funds charge index-fund-like fees—often less than 0.10%—unless they outperform.
Mr. Miller also has his doubts that several months of better performance will reverse the trend toward passive funds.
Index-fund giant “Vanguard is getting billions of dollars a month,” he said.
Vanguard Group pulled in a net $48 billion in January and $33 billion in February, a spokeswoman said.