Mutual funds witnessed a lackluster end to what was an overall strong first half of 2024, Bank of America strategists noted Tuesday.
According to BofA’s analysis, active funds underperformed notably in June, with only 40% of large-cap funds surpassing their Russell benchmark, placing it in the 30th percentile since 1991.
The narrow market breadth remained a significant challenge, as only 20% of stocks outperformed the S&P 500, marking a record low in data history dating back to 1986.
But despite two consecutive months of underperformance, 55% of large-cap funds are still ahead year-to-date, significantly above the annual average of 37%.
“A strong tilt toward Momentum has likely helped performance this year but puts funds at risk heading into 2H if we see volatility pick up and breadth improve,” Bank of America strategists said.
Meanwhile, 74% of large-cap Value funds outperformed in the first half of the year, significantly better than the year-to-date hit rates for Core (58%) and Growth (43%) funds. Value funds had a more manageable benchmark and benefited from a broader rally, with 40% of Value stocks outperforming their benchmark compared to 20% of Growth stocks.
The top five companies accounted for 70% of the Growth Index's return, making it challenging to outperform without a highly concentrated portfolio and a strong mega-cap tilt.
BofA said only 30% of small-cap funds beat their Russell 2000 benchmark, marking the lowest monthly hit rate since February. Small-cap funds' focus on High Quality stocks has generally aided performance this year but proved detrimental in June, as the lowest return on equity (ROE) quintile outperformed the highest by over 2 percentage points.
“Despite the setback, small-cap funds still posted the strongest hit rate in 1H, with 57% of small-cap funds outperforming vs. 55% of large-cap funds and 37% of mid-cap funds,” strategists highlighted.
Quantitative funds also performed strongly in the first half of the year, with 75% of these funds surpassing the Russell 1000.