Active Fund Managers :Stock Pickers or Part of the "Mob" ?

One of the greatest cliches heard in the financial markets from active managers is that the market is in a "stock pickers market". With the growth of ETFs their new argument goes, investors are mindlessly buying stocks in an index while stock pickers can find undiscovered gems.

But the evidence shows quite the opposite. Active managers are more part of a performance chasing mob than individual investors in ETFs. The big outperformers this year have been the "FANG" (more correctly (FAANG)stocks: Facebook, Amazon,Apple,Netflix and Google (alphabet).

As noted in this analysis active fund managers have large overweights in the FANG stocks even though they reduced them as of this September 6 report>

Fund managers are no longer as smitten by the FANG stocks as they used to be even as they continue to pile into technology stocks for the seventh consecutive month, according to a research note from Bank of America Merrill Lynch (BAML). Large cap fund managers now have a record overweight(vs the S+P 500) in the sector but are opting to rotate out of the FANGs

Alphabet Inc

GOOGL

973.72

+0.92%

in favor of less crowded stocks.

This year, the FANGs' stock performance has far outpaced the S&P 500 Index. Now, it seems that fund managers are starting to conclude the FANGs' biggest gains are over. Look at these numbers. Fund managers’ overweight position in FANG stocks has dropped from 71% to 64%, 

And where did those managers mover their money that left the FANG stocks ? into another hot sector.:

 their overweight positions in tech, internet retail and other non-Fang stocks has jumped from 16% to 22%, according to BAML.

Which investors are actually taking too much risk by concentrating in tech and FANG? those active managers..or the investors in the largest ETF SPY=the S+P 500. Of course the FANG and technology stocks can't be "overweighted" vs the index...they are the index.

Netflix makes up less than 1% of the SP 500 but apple, amazon, facebook, and google make up a combined 10% certainly a high amount...now consider that active managers are 60% overweighted .All of those stocks except Apple carry high valuations far higher than the S+P 500. Amazon which plows most of its money back into investments has a p/e measured at an astronomical p/e based on actual earnings of 2016 of 195.

 Add to that the fact that they have moved their sales of those stocks into technology many of those high flyers of late and it is hard to see how the active managers have done stock picking by "going against the crowd".

If the growth of indexing has created opportunities for stock pickers..it doesn't seem like those stock picking active managers are doing much research..they are just following the herd and buying what is going up...not searching for undiscovered gems.


Investors a who included "smart beta" strategies such as momentum and small value in their  ETF (which carry fees a fraction of those even on the lease expensive active funds) portfolios would have  lower weight for the fang stocks than the active managers and the sp 500. Interesting the Momentum ETF (MTUM) includes only one of the Fang stocks among its top ten holdings--the one with the lowest p/e of the group..Apple. And of course small value ETFs like VBR don't hold any of those stocks at all.

So which investors are blindly chasing stocks because of recent performance: the active fund manager or the investor who holds the SP 500 or ETF r an ETF portfolio that includes some "smart beta "holdings ?