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February 13th, 2012 by

In New Year, Being More Active Is Thus Far Good (Financial) Advice By Sarah Morgan

Mutual-fund managers who actively trade—and pile up fees in the process—have long been punching bags for investors. But suddenly they look like heavyweight champs.

After being trounced by the stock market for years, so-called active managers are on a hot streak. In January, 70% of large-cap stock pickers outperformed the S&P 500-stock index, according to data from Bank of America Merrill Lynch. Not even a quarter of them could make such boasts for all of 2011.

Yet even the recent winners are reluctant to declare a return to a stock picker’s market. “Knock wood, six weeks isn’t a trend, but it has been a better environment,” says Bill McVail, manager of the Turner Small Cap Growth fund. His $271 million actively managed fund gained more than 7% in January, beating the S&P 500’s 4.5%.

Others in the field say it is the market that has changed, not the managers. “Some might say we have a hot hand this year, but in fact our hands have largely been idle,” says Whitney Tilson, co-manager of the $16 million Tilson Focus fund, which gained 14.32% in January.

The business of picking stocks is fraught with risk and long positive streaks are rare. The fees don’t make it any easier to beat the competition, given that the average active fund charges 1.29% in fees while the average index fund charges 0.59%, according to Morningstar.

Between 2000 and 2009, on average less than half of active funds beat the broader market each year once fees are taken into account, and over five-year periods, most active funds in every category lag their benchmarks, according to data from Standard & Poor’s.

That performance is one reason investors have been flocking to low-cost index funds and exchange-traded funds. Consider that only 41 ETFs—out more a total of more than 1,400—are actively managed, according to fund tracker Morningstar Inc.

But some fund managers and analysts say this year’s stable market plays into the hands of stock-pickers. After a year of intense volatility, with stocks moving largely in lock-step based on big-picture economic fears, stocks have been less correlated in 2012.

This is considered beneficial to active management, which focuses on company fundamentals more than momentum and broad market sentiment. “The world got a bit safer, and all of a sudden the earnings growth and power of a company is starting to matter more,” says Larry Rakers, manager of the $8 billion Fidelity Dividend Growth fund.

If active managers continue to outperform—making those higher fees a fair price to pay—many financial advisers will be in awkward positions after steering their clients into other options. But most are urging caution, suspecting that the strong performance is unlikely to last. “I don’t think last year was an anomaly,” says Kevin Mahn, the chief investment officer at advisory firm Hennion & Walsh. “That’s becoming more the norm.”

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