Why 2014 Was Tough for Active Managers

Fund Watch

Why 2014 Was a Tough Year for Active Fund Managers

The Kip 25’s stock mutual funds couldn’t keep pace with the S&P 500 index.


What’s up with our favorite U.S. stock funds? None of the 12 actively managed funds in the Kiplinger 25 beat the broad market over the past 12 months. The reason: Big-company stocks blew away their small-cap brethren.

Tool: Kiplinger's Mutual Fund Finder

Small- and large-capitalization stocks rose in lockstep in late 2013 and early 2014. “Everything was moving in sync,” says Chris Brightman, of Research Affiliates, a Newport Beach, Calif., money management firm. The Russell 2000 small-cap index and Standard & Poor’s 500-stock index, which tilts toward big firms, each rose more than 7% in the five-month period that ended last March.

But then investors started getting nervous and embarked on a flight to quality, marked by gains in the dollar and Treasury bonds, says Brightman. In turn, large-cap stocks rose 9.0% from March 31 through October 31, while small caps, perceived as riskier, were up only 0.8%. “If you were an active manager holding a lot of small-company stocks, you would have underperformed the market,” says Gregg Fisher, of Gerstein Fisher, a New York City money manager. Funds with major stakes in foreign stocks suffered, too. The MSCI EAFE index, which tracks big-cap stocks in developed markets, fell 3.2% over that stretch.


Thus, the Kip 25 funds with the most exposure to small caps tended to fare poorly; those with the least exposure fared better. To wit: The three small-company funds in the Kip 25—Baron Small Cap (BSCFX), Homestead Small-Company Stock (HSCFX)and T. Rowe Price Small-Cap Value (PRSVX)—trailed the S&P 500 by between 9 and 13 percentage points over the past year. By contrast, two funds in the Kip 25 that are among those with the slimmest exposure to small and mid caps, Dodge & Cox Stock (DODFX)and Vanguard Dividend Growth(VDIGX), fared better over the past 12 months. They have 12% and 2% of their assets, respectively, in small caps and mid caps.

And yet, the funds still lagged the S&P 500. The reason: They didn’t own the right big-cap stocks. The top 100 firms by market value in the S&P 500 returned 19.8% over the past year, 2.9 percentage points more than the index itself. Active managers typically seek—and find—more opportunity in the smaller firms of the S&P 500, says Brightman, and don’t invest as much in the index’s biggest outfits because those tend to be closely followed and fairly priced.