It's a 'Large Cap' World: Why the Biggest Stocks are Outperforming

This spring was an exceptionally strong time for large-cap stocks, and performance was even stronger among a few select industries.

According to Merrill Lynch, via Business Insider, many large-cap mutual funds outperformed their benchmark indices at one of the best rates since February 2015. In fact, so far this year nearly 52% of fund managers are on track to beat their benchmarks for the year. How is this possible?

A massive shift to moving stocks into the two highest performing sectors: consumer discretionary and technology. When you buy the largest, and strongest names in these sectors, one ought to expect a phenomenal return. 

At the same time, these investors made a strategic move away from more cyclical sectors that were expected to post strong gains IF economic growth and inflation were on the rise after the US Election in November. 

It's as though managers were aware of the ramifications of last week's actions regarding the Paris Agreement, because portfolio managers held the biggest underweight in the materials sector since 2010, and they had the lowest exposure to the energy sector since prior to the US Presidential Election.

Outperformance of large-cap managers follows forecasts that these stocks would outperform index funds in 2017; these are assets that usually move together, but somehow lost their correlations after the election. 

This is not to say though that actively managed portfolios are the way to go; nearly all of them underperform the market by strikingly sad numbers. In fact, over a 15-year period ending December 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers UNDERperformed their benchmarks.

What's the takeaway here? While large-cap stocks seem to be leading the way higher for the broader market, it's worth considering looking into the strongest names yourself and investing in these individually rather than relying on overpaid and underperforming fund managers.