Welcome to RBC’s Markets in Motion podcast, recorded July 24th, 2023. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Two big things you need to know:
- First, actively managed long-only funds are underperforming their benchmarks for the year in most of the US categories we are tracking, with Small Cap Value emerging as a bright spot.
- Second, the cross currents for US equities are getting more complicated based on our high frequency indicators.
If you’d like to hear more, here’s another five minutes. While you’re waiting a quick remind that you can subscribe to this podcast on Apple and Spotify.
Now, the details.
Starting with takeaway #1 on performance: our charts of the week tackle a question that we’ve been discussing amongst ourselves on the RBC US Equity Strategy team: how is the performance of actively managed long-only funds looking, in what has been a highly confusing start to the year for the buy-side? The answer is that it’s been tough.
- We reviewed the cumulative 2023 performance of actively managed funds tracked by EPFR in several different Large Cap and Small Cap categories, and compared those returns to the passively managed funds in their universe.
- We found that Large Cap funds that benchmark to the S&P 500 have been lagging in 2023, and that the gap between actively managed and passively managed funds widened significantly in the 2nd quarter.
- Growth and Value managers in the Large Cap space are also having a tough year. We saw similar trends for funds that benchmark to the Russell 1000 Growth and Value indices.
- Things have been better in Small Cap, though far from easy. Russell 2000 benchmarked funds are underperforming for the year, though to a far lesser degree than what we are seeing for their S&P 500 benchmarked counterparts.
- This is also the case for Small Cap Growth funds. Interestingly, both Small Cap Core and Small Cap Growth funds have spent decent amounts of time this year beating their benchmarks as their underperformance took hold near the end of the 2nd quarter.
- Small Cap Value funds have been the bright spot. Despite a rough start to the year, they began to outperform in late 1Q23 and have sustained that outperformance into July.
Moving on to takeaway #2: our high frequency indicators illustrate how the cross currents for US equities have gotten quite complex.
- On the negative side:
- Individual investor sentiment continues to creep toward worrisome territory. Net bullishness hit 29% in last week’s AAII survey. This indicator was sending a deeply contrarian but strong buy signal for stocks to start the year, and has typically signaled that US equities are overbought when it crosses +30% in favor of the bulls on a four-week average. Most of the other sentiment indicators we track still have room to run, but this worries us nonetheless.
- The US has gotten expensive relative to Europe. This is another data point we can put on the reasons to start worrying a little bit list. The weighted median forward P/E of the S&P 500 is back to the peaks of the last few years relative to Europe. The US had been looking more reasonably valued vs. Europe to start the year.
- Funds flows are starting to shift. US flows were strong in 2Q and resilient in the face of inflows to bond funds, but have started to fade.
- Within the US, Growth funds are now seeing outflows while Value funds are no longer getting less negative.
- Small Caps are once again a bright spot, with flows improving for all styles….
- …and for both active and passive.
- Within Small Cap active, Blend and Value are showing the best trends.
- On the more positive side:
- Near-term economic expectations have continued to improve. Consensus real GDP forecasts for 3Q23 on a Q/Q basis have now moved into slightly positive territory as recession fears have faded.
- Leadership is starting to shift. Banks (including Regionals) are starting to outperform the Nasdaq 100….
- …within Large Cap and Small Cap, Financials and Energy are starting to outperform…
- ….Growth is stalling relative to Value in terms of style.
- ….Small Caps are starting to outperform Large Caps.
- Many of these non-sector trades had been hitting the extremes seen in recent years that foreshadowed past inflections. Overall, recovery and cyclical trades seem to be back on which is keeping the broader market moving up for now.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.