Actively-managed mutual funds are having their best year since 2009, according to an analysis from Goldman Sachs, which found many active funds decisively beating their benchmarks and, in many cases, the overall market.
What’s the secret-sauce these super-savvy fund managers are deploying to achieve such sterling success?
Cash.
For more insight on how to use cash to your advantage in this volatile market, read on and consider matching with a trusted financial advisor.
Why Is Cash Giving Portfolios a Boost?
It’s not impressive, it’s not complicated and it’s widely available to any investor who wants it, but jumping into the greenback dollar avoids the heavy losses hitting stocks. In addition, the interest rate hikes from the Federal Reserves Open Market Committee – upping the Federal Funds rate from nearly 0% to 2.5% in July — and another 75 basis points in September — has increased yields on cash investments.
About half of all actively managed mutual funds are beating their benchmarks, a significant increase from the 10-year average of 34%, according to data compiled by Goldman Sachs Group Inc.
The analysis found that mutual funds had boosted their cash holdings from a 30-year low of 1.5% to as much as 2.4% this year. That’s the quickest turn to cash fund managers have made since the great recession hit in 2008.
How Do Funds With High Cash Allocations Compare to the Rest of the Market?
Before anyone gets too excited, however, it’s important to note that even while many funds are performing better than the market, they’re still down for the year. Still, limiting losses in a down market is a key element of building an effective investment portfolio.
A look at the year-to-date performance of several of the market’s largest mutual funds (as of Aug. 1) gives a good snapshot of the trend, which shows actively managed value funds outperforming the broader market (as measured by the Standard and Poor’s 500 Index), while growth-oriented funds are doing worse.
Compare these three very big value funds to the overall market, as represented by the S&P 500 Index:
- S&P 500 Index (SPX): -16.77%
- Fidelity Low-Priced Stock Fund (FLPSX): -10.75%
- JPMorgan Equity Income Fund Class I (HLIEX) : -6.79%
- American Funds American Mutual Fund Class F-3 (AFMFX): -5.58%
Without making the jump to cash, funds would be doing much worse based on stock-picking, according to Goldman strategist Cormac Conners, who wrote, “On a pure stock selection basis, the portfolio of the average mutual fund has trailed the Russell 1000.”
Growth-oriented funds have taken a hit this year as higher interest rates sparked a rapid reevaluation of many emerging companies, especially in the tech sector, that rely on borrowing to fund their growth. One of the market’s biggest growth funds, the Fidelity Contrafund (FCNTX), was down 25.64% as of Aug. 1.
This is a rare opportunity for actively managed mutual funds to shine. Financial planners routinely recommend that investors skip active funds because of their higher management fees and their long-term tendency to underperform the fund benchmarks and the overall market. According to data from Dow Jones, 79.6% of all actively managed funds under-performed their index during 2021. During the 20 previous years, 90.3% of active funds under-performed.
Actively managed funds also charge higher fees than passively managed exchange-traded funds (ETFs), which simply follow an established market index, such as the Dow Jones Industrial Index or the S&P 500. During 2020, actively managed funds charged an average cost of 0.71% compared with 0.18% for ETFs.
Do-it-yourself investors looking to head into cash can consider bank certificates of deposit (CDs), bank money market funds, or money market mutual funds, which invest in cash, cash equivalent securities (such as corporate commercial paper), and highly rated short-term securities, such as U.S. Treasury bills.
The Bottom Line
Amid a down market, rising interest rates are boosting the returns on cash investments. Actively managed funds, according to Goldman Sachs, are beating the rest of the market because of their high cash allocation. Though they still may end up with their portfolios in the red, investors can staunch the hemorrhaging losses by investing in cash assets likeCDs and U.S. Treasury bills. Be sure to consult with an expert financial advisor to strategize how you might best use cash in your portfolio.
Wealth-Building Tips
- Not sure what asset allocation mix and strategies will help you meet your long-term goals? For a solid financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.
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