A Stock-Pickers Comeback? Not So Fast!

Summary

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WSJ Your Money Briefing

Episode: "A Stock-Pickers Comeback? Not So Fast!"

Date: April 5, 2018
Host: J.R. Whalen
Guest: Chelsea Delaney, WSJ Markets Reporter

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Episode Overview

This episode examines whether active mutual fund managers—also known as “stock pickers”—have truly made a comeback after a strong stretch early in 2018. Wall Street Journal markets reporter Chelsea Delaney joins host J.R. Whalen to discuss how recent market volatility and sector trends, particularly in tech, have dramatically shifted the fortunes of active managers, challenging narratives about their renewed relevance compared to passive index funds.

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Key Discussion Points

1. The Recent Surge and Setback for Stock Pickers

• Background: Stock pickers had struggled in recent years due to underperformance and higher fees compared to index funds.
• Temporary Rebound: In the past year (spring 2017–March 2018), active fund managers performed well by heavily investing in tech stocks, especially the “FAANG” companies (Facebook, Amazon, Netflix, Google).
• Turning Point: Tech sector volatility and regulatory concerns in March 2018 began to erode these gains, spelling trouble for active managers.

Notable Quote:
“Before last year, stock pickers had sort of been, they had sort of been left for dead... That sort of started to change last year in part because these fund managers had really ramped up their exposure to tech.” — Chelsea Delaney [02:19]

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2. The Role and Risk of Tech Stocks

• Investment in FAANG: Active managers’ fortunes rose and fell with big tech companies.
• Regulatory and Data Issues: Rising concerns about data privacy and potential regulation began to pressure tech stocks, reversing some of the strong gains from earlier in the year.

Notable Quote:
“What the tech sector giveth, the tech sector taketh away.” — J.R. Whalen [03:02]

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3. Market Volatility and Stock Correlation

• Correlations Explained: When individual stocks move independently (low correlation), stock pickers have better odds to outperform.
• Volatility’s Impact: Recent market volatility has increased stock correlations, making it harder for active managers to distinguish their performance from the broader market.

Notable Quote:
“It’s a lot easier to make money when stocks aren’t all moving together... But when things get really volatile, stocks tend to move together. They start to snap back into these tight relationships.” — Chelsea Delaney [04:33]

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4. The Persistent Case for Index Funds

• Long-Term Data: Despite brief periods where active managers outperform, research continues to show that, after fees, low-cost index funds typically yield better long-term results.
• Growth of ETFs: Exchange-traded funds that track broad market indexes like the S&P 500 and the Dow Jones have become increasingly popular.

Notable Quote:
“Even if there are these periods where maybe active managers are doing better for a year... over the long run, returns tend to be better if you’re just sitting in a passive index fund.” — Chelsea Delaney [05:29]

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Notable Quotes & Memorable Moments

• The Tech Stock Bet:
  “They had bet a lot of money on Amazon and Facebook and just generally like the FAANG stocks... So when those stocks started to take off, they did really well.” — Chelsea Delaney [02:19]

• Changing Fortunes:
  “It’s just taken really, what, three or four weeks of all this upheaval and it’s totally changed things for them.” — J.R. Whalen [03:50]

• Correlation Challenge:
  “The volatility has also made stock movements a lot more correlated. That’s also not great for active managers.” — Chelsea Delaney [04:33]

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Key Timestamps

| Timestamp | Segment Description | |-----------|----------------------------------------------------------| | 00:29 | Introduction and episode setup | | 02:19 | Why stock pickers briefly thrived in 2017–2018 | | 02:58 | Explanation of “FAANG” and sector exposure | | 03:06 | Tech sector reversals and regulatory concerns | | 03:50 | Impact of recent volatility on active managers | | 04:28 | The importance of stock correlations for performance | | 05:29 | Data showing index funds’ outperformance over time |

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Conclusion

While 2018 started as a banner year for active fund managers, the return of market volatility—driven by concerns in tech and higher correlations among stocks—is reversing their brief resurgence. Long-term evidence still favors low-cost index funds for most investors, underscoring the challenges stock pickers face in maintaining outperformance.

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Hosted by J.R. Whalen, with reporting from Chelsea Delaney (WSJ).
For continuous coverage of markets and investing, follow The Wall Street Journal.

Transcript

[Charles Schwab Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise

[Chelsea Delaney]

your money briefing Money and

[J.R. Whalen]

market stories from the Wall street journal. I'm J.R. whalen in New York. Active fund managers on Wall street have seen glory days the past several months, but all of a sudden the tables are turning. We'll have details in just a moment. First, these money items you should know. A recent uptick in mortgage interest rates is increasing costs for buyers already grappling with rising prices. The average monthly mortgage payment is up nearly 13% nationally over over the past year. That's an increase of $168 per month for luxury homes. The top 10% of the market owners are paying an average of $241 more per month. And mortgage interest rates are about a half a percentage point higher than they were at the beginning of the year. The Mortgage Bankers association says the average rate on a 30 year fixed rate conforming mortgage was 4.69% in the week ending March 23rd. The average rate for a 30 year fixed rate jumbo was 4.6%. The Wall Street Journal Real Time Economics Desk cites a University of Chicago study that indicates that trade barriers aimed at protecting US Factories could boost manufacturing output, but they're unlikely to bring back many blue collar jobs. The US shed about 5.5 million manufacturing jobs between 2000 and 2017. That's more than twice as many as lost between 1980 and 2000. And those job losses were more highly concentrated among lower skilled positions often filled by men with less education. This is your money briefing from the Wall Street Journal. Welcome back, everybody. 2018 has been a good year for active mutual fund managers, also known as stock pickers. That is if the year ended on March 31. But this year's market volatility appears to be turning the tables and Wall Street Journal markets reporter Chelsea Delaney is, is here to explain. So Chelsea, these active fund managers had a tough go of it in recent years, but then really excelled in the past 12 months.

[Chelsea Delaney]

Yeah, so I mean, before last year, stock pickers had sort of been, they had sort of been left for dead. There was a lot of research basically showing that, you know, it wasn't worth the fees that they charged because you could just put all your money in a low cost index fund and get a better return. So they had a really hard time. And that sort of started to change last year in part because these fund managers had really ramped up their exposure to tech. So they had bet a lot of money on Amazon and Facebook and just generally like the faang stocks, they had a lot of exposure to that. So when those stocks started to take off, they did really well.

[J.R. Whalen]

Faang stocks being Facebook, Amazon, Netflix, Google.

[Chelsea Delaney]

Yes.

[J.R. Whalen]

And so I guess what the tech sector giveth, the tech sector taketh away.

[Chelsea Delaney]

Definitely. So tech stocks in general have been under a lot of pressure since March. That comes as there's a lot of questions over their use of user data over if they're going to face tighter regulation. A lot of those stocks that had been doing so well and had been doing really well for active managers had started to turn around on them. The report that I referenced in my article was a report from bank of America. And it showed that after a really strong January and an okay February, active managers had a not great March. And so, you know, we're in April now. There's still a lot of pressure on tech stocks. So, you know, they probably are facing some headwinds right now.

[J.R. Whalen]

It really does show you the degree to which the volatility has changed things up for the active managers because they were riding high, they had great, great numbers. And it's just taken really, what, three or four weeks of all this upheaval and it's totally changed things for them.

[Chelsea Delaney]

It has. I think people had gotten really optimistic on stock picking Again, they were like, stock picking is back that it started to change the narrative. But the two things that they had really been benefiting from was tech exposure and market correlations had been pretty low.

[J.R. Whalen]

You mentioned stocks becoming more tightly correlated in your story.

[Chelsea Delaney]

What exactly does that mean for stock pickers? It's a lot easier to make money when stocks aren't all moving together. It's easier to pick a stock and be able to ride that. Whereas if you're competing with an index fund and all stocks are moving together, you're at a disadvantage. When markets were really calm and upbeat, stock correlations were pretty low. That had also been good for active managers. But when things get really volatile, stocks tend to move together. They start to snap back into these, these tight relationships. The volatility has also made stock movements a lot more correlated. That's also not great for active managers.

[J.R. Whalen]

Even looking at the market individual performance over the past couple of years, with the run up and the volatility, you do point out in your story that plenty of data shows that lower cost index funds tend to outperform stock pickers over the long term.

[Chelsea Delaney]

Yes. There's been a lot of research on this. Some of the ETFs, some of the exchange traded funds that have gotten really popular are things that track the S and P, the Dow, these other funds. And basically the research shows that when you take into account costs, when you take into account returns, when you take into account fees, even if there are these periods where maybe active managers are doing better for a year because some of these things have fallen in their favor, tech exposure, low correlations over the long run, returns tend to be better if you're just sitting in a passive index fund.

[J.R. Whalen]

Well, a good reason to stand by and pay attention to the markets. Team here at the Wall Street Journal to follow the markets and the volatility and the impact on the active fund manager market. And that is Wall Street Journal markets reporter Chelsea Delaney joining us here in our studio. Chelsea, thanks for being with us.

[Chelsea Delaney]

Thank you.

[J.R. Whalen]

And that's your money Briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Charles Schwab Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.