Analysis: Rewards shift to stock pickers in U.S. market rally

Mon Nov 4, 2013 10:14am EST
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By David Randall

NEW YORK (Reuters) - It's a good time to be a stock picker.

Some 57 percent of U.S. funds run by active managers are beating their benchmark indexes this year, according to fund-tracker Morningstar. That is the best overall performance for the industry since 2009 and well above the 37 percent of funds that typically top the indexes.

Stock pickers are doing well in part because after more than four years of marching higher en masse, stocks have started to separate themselves into leaders and laggards. The lines of demarcation became more pronounced during the past few weeks as U.S. companies reported their recent quarterly results.

Nearly 69 percent of companies are beating analyst estimates in the third-quarter - that's typical, but this season the misses are not concentrated in any particular sectors. Each sector has had its share of high-profile shortfalls.

Look no further than technology: Thomson Reuters data shows that 84 percent of the 55 tech companies reporting so far surpassed earnings forecasts. Yet investors sent IBM (IBM.N: Quote) to a 2-year low on weak sales figures, and several chipmakers took a hit after issuing disappointing forecasts.

Implied correlations - a measure of how closely the performance of individual stocks mirrors that of the index itself - have fallen to their lowest since October 2007 after peaking in 2011, according to a research note from Cantor Fitzgerald. That means that instead of the returns of most stocks clumping close to the index returns, there is a much broader spread on how individual shares are performing.

That's a sign that investors are picking winners and losers. It also suggests the bull market - which has carried the S&P nearly 170 percent higher since March 2009 - is starting to show its age. The S&P 500 has set 33 new highs this year after failing to reach record levels since 2007. Now there are fewer beaten-down stocks that offer the chance for a quick pop higher.

Instead of searching for screaming bargains, fund managers are turning their focus to well-run companies that have sustainable advantages and may hold their value during a downturn, however unlikely that may seem at the moment.   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) October 23, 2013. REUTERS/Brendan McDermid