Stock picking has made a comeback as active managers steer clear of trade war-sensitive stocks. And according to a Goldman Sachs (NYSE: GS) report, the strategy is paying off.
According to Goldman, 42% of large-cap active mutual funds have outperformed their benchmark so far this year, which is notably higher than the historical average of 34% during the past 10 years.
The investment firm also came up with a way to mirror those funds’ strategy. Goldman has a portfolio that tracks stocks where these funds have the most overweight positions, and so far in 2019, this basket of stocks has outperformed the S&P 500 by 2.4 percentage points.
While actively managed funds are still seeing net outflows, the exits have been “significantly” lower this year.
“Solid YTD fund returns, elevated uncertainty, and a ‘late-cycle’ mindset among investors have also likely reduced outflows from active management in 2019 relative to the past few years,” wrote Goldman Sachs chief U.S. equity strategist David Kostin in a note from Wednesday.
Of the 50 stocks that have the most bullish following among average large-cap funds, five stood out. Funds are most overweight Visa (NYSE: V), Comcast (NASDAQ: CMCSA), Salesforce (NYSE: CRM), Google-parent Alphabet (NASDAQ: GOOGL, GOOG), and ServiceNow (NYSE: NOW).
Of these five stocks, ServiceNow has performed the best so far this year, returning nearly 49% year-to-date. And while Wall Street is bullish on all five stocks—with each carrying a consensus Buy rating—Google and Salesforce are expected to have the most upside ahead, with price targets 16.4% and 15% higher, respectively.
Kostin highlighted taking more bets on stocks where mutual funds are most overweight, and said the consumer discretionary and industrials sectors have done well.
Fund managers have also been limiting their exposure to industries and stocks that will be the most impacted in the ongoing trade war between the U.S. and China, “which has benefited relative fund returns in recent weeks” as trade tensions have ratcheted higher.
According to the analysis, mutual funds are underweight the 20 stocks with the highest sales exposure to China, and those stocks have lagged the S&P 500 since the beginning of the month when President Trump tweeted about raising tariffs on $200 billion worth of Chinese goods from 10% to 25%.
“The escalation in trade tensions has also likely supported recent relative fund returns,” Kostin wrote.
While stock picking and staying away from stocks with significant exposure to China has paid off so far this year, it would be unwise to follow all of the moves mutual funds are making. Most active investors had an overweight tilt toward the healthcare sector, one of the worst performing sectors this year. Most funds also missed out on the rally in Real Estate, a sector that has outperformed the S&P so far in 2019.