The Rally's Dark Side: 68% Of Growth Funds Are Now Underperforming, A 30% Increase In Three Weeks

Tyler Durden's picture

Prayer, courtesy of central banks, may still be a "valid" investing strategy, but "growth" no longer is: for all the euphoria over the stock market outperformance in the last few days on the heels of one after another rumor of ECB intervention in the peripheral bond market (now largely denied by Germany's finance minister) one would think that managers of all funds would be delighted at the sudden reprieve they have gotten courtesy of the European central bank. One would be wrong: as GS' David Kostin calculates, at the end of June, 52% large-cap growth funds had underperformed the Russell 1000 growth fund, aka their benchmark index. Three weeks later, this number has soared to 68%, a 30% increase in underperformers, which means that despite the headline S&P print, the bulk of active stock pickers once again face that most dreaded of Wall Street possibilities: career risk. Said otherwise, while those positioned to outperform in an environment of global slowdown are celebrating, everyone else is again polishing their resume, as the following chart confirms.

Goldman's observations:

July is proving to be an extremely painful month for large-cap growth fund managers. At the end of June, 52% of large-cap growth funds had underperformed the Russell 1000 Growth Index YTD. However, just three weeks later, with the Russell 1000 Growth index having dropped by 1.0%, fully 68% of growth funds now lag the industry benchmark. In contrast, large-cap Core and Value funds have both kept pace with their respective indices since the start of 3Q.

What happened? Four reasons seem to explain the underperformance.

First, a select group of glamour growth stocks plunged sharply this month: Chipotle Mexican Grill (CMG, down -24% in July, -14% YTD), United Continental Holdings (UAL, -21%, +2%); Las Vegas Sands (LVS, -16%, -15%); Fossil (FOSL, -7%, -11%) and Netflix (NFLX, -17%, -18%). In total, 50 other stocks in the Russell 1000 Growth index fell by more than 10% in July. These positions actually had only modest negative impact on aggregate fund manager performance because although Growth funds had allocation perhaps 2X the index weight of a particular security, the position sizes were often only 25 bp.

Second, the largest overweight positions relative to the benchmark lagged. Although some stocks that large-cap growth managers have consistently owned well above a benchmark weight outperformed (NKE, GOOG, QCOM) many other overweight positions lagged such as MA, AMZN, SBUX, CSCO, and PCLN. Along with the rest of the market many of these firms reported weak sales and EPS results in 3Q.

Third, the July underperformance of growth funds might also relate to another source of potential basis risk. Some managers might have unwittingly – or perhaps knowingly – embedded risk into their portfolio by ignoring the annual Russell Index  rebalancing that occurred in late June. Major constituent changes occurred this year. For example, ExxonMobil’s (XOM) weight in the Russell 1000 Growth Index dropped from 419 bp to a zero weight. Medtronic’s (MDT) weight fell from 50 bp to 4 bp, Freeport McMoRan’s (FCX) weight dropped from 45 bp to zero; and IBM’s weight declined from 343 bp to 310 bp. Stock positions gaining in importance in the Russell 1000 Growth Index rebalance included Intel (INTC) from zero weight to 145 bp, Verizon (VZ) from 39 bp to 184 bp; Amgen (AMG) from zero to 83 bp, and Union Pacific (UNP) from 13 bp to 83 bp. Unfortunately, it is difficult to evaluate how much index rebalancing contributed to underperformance by Growth funds during July because holdings are released with a delay. However, Value fund relative underperformance did not change in July.

Fourth, large-cap Growth funds were underweight several key index constituents that outperformed in July. Examples include WalMart (WMT), Walgreen (WAG), Altria (MO), and Phillip Morris International (PM). These Consumer Staples firms are often viewed as unexciting. But the constant flow of weak macro and micro data makes it precisely the type of environment that is conducive to these shares outperforming.

Weak data abounds at the macro and micro levels. The 2Q GDP release showed the US economy expanded at a lackluster pace of just 1.5%, consistent with our view of a stagnating economy (growing, but at a below trend rate). Goldman Sachs Economics forecasts US GDP growth will average less than 2% in both 2012 and 2013. The ‘fiscal cliff’ looms less than six months away with an anticipated impact of $193 billion in our political analyst’s view.

Corporations corroborate the weak macro data. We expect the 2Q earnings season will lead to further erosion in CEO confidence. Executives across industries are highlighting the weak demand in their respective end-markets, not just in Europe but in Asia and the US as well. Negative sales surprises are occurring at twice the average rate during the past seven years while positive  top-line surprises are half as frequent. Earnings results are more consistent with history as firms benefit from lower energy prices and take great effort to maintain margins. However, firms have slashed forward guidance and the commentary on conference calls has been decidedly downbeat with a few notable exceptions such as CAT and WFM.

It is not surprising stocks owned by growth funds have lagged in recent weeks. The premium P/E previously assigned to superior expected growth has been eroded as the economic and profit outlook has become more uncertain. We recommend high quality stocks to minimize the possible drawdown risk in the current market. So far, 293 stocks in S&P 500 have reported 2Q results (71% of total cap). Next week 117 firms (16% of market cap) will report 2Q results including: COH, ADM, PFE, AET, MA, PG and VIAB.

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slewie the pi-rat's picture

in breaking news:  growth funds are underperforming due to growth taking the gold at this year's "hide & seek" economic olympics

q99x2's picture

Get the funds out of the market now or arrest their managers. It is illegal and immoral to gamble with other peoples money. Arrest Altucher. 

lizzy36's picture

OPM is what makes the world go round.

Last i checked nobody holds a gun to the head of those willing to pay ridiculous fees to an underperforming manager.

Don't worry bernanke has the long only managers back.

disabledvet's picture

Return of OPM isn't a bad business model either. Let's it 50 billion folks are out on Facebook alone? Throw in Groupon, Zynga, Chesapeake, Hewlett Packard, wonder people just stick with Treasuries and gold. "taint beanbag" is it...

Hype Alert's picture

You didn't earn that.  Somebody else earned that.  Appears to be a true statement in this case.


Interesting though.  I wonder if goosing it before the end of the month will help their monthly statements?  We'll see what August brings, stormy weather along with stormy markets.



Sudden Debt's picture

come on! best out of 3!!! give'm another chance!
double or nothing!
There's always enough others people money!

Temporalist's picture

Growth!  It has electrolytes!

linrom's picture

Martin Armstrong scenario is coming on just as he predicted: summer weakness to be followed by bull move to new highs. Although this should not surprise anyone, he was calling for global economic bottom for June 2012 years ago  when he started writing again in late 2008. By spring of 2009, he was calling for a move from 6000 to over 10,000 and then back to new highs. He is not as bullish as Dan Wolanchuck, who also in the spring of 2009 was calling for a DOW move to 20,000---the blogoshere was looking for what: DOW 3,000. No surprise.

Uber Vandal's picture

Perhaps "smarter people" created the Algos that blew my stop out on a particular mining stock a while ago, and ended the day UP FFS.

But, perhaps in the end, I was smarter for I simply walked away from the table and have not looked back.

The last time a similar event happened to me was 20 years ago playing black jack at a casino. The dealer had two sevens showing, and drew a third seven.

EVERYONE got up and left after that.


disabledvet's picture

Trading on inside information doesn't hurt either. Getting that crowd to trade against you and win on the other hand...

JR's picture

What does it cost a society to have a lying, cheating government?  Yesterday’s National Public Radio gave at least one hint.  Here’s the story from the video transcript of Losing With LIBOR: One Trader’s Story :

If those words — "manipulation of a key interest rate" — leave you wondering what the big deal is, and who would be harmed, meet Dan Sullivan. He says the manipulation of LIBOR cost him a million dollars, in just 24 hours.

Dan Sullivan used to work on a trading floor at the Chicago Mercantile Exchange, for Sullivan Crauth Trading, "which is me, my brother, and one other guy," Sullivan laughs.

Dan wasn't trading cotton or soy beans. He was in an arguably much bigger market you've probably never heard of: He was buying and selling derivatives based on that interest rate, LIBOR, that the big banks have been accused of manipulating.

People buy these derivatives for lots of reasons, but for what happens next, all you need to know is that on Sunday, Sept. 14, 2008, Sullivan was holding some derivatives that amounted to a lottery ticket. It was a small bet that would pay off big if something crazy happened with LIBOR.

And something crazy did happen.

"Sunday afternoon, I was at my brother’s house watching the White Sox game, and it started coming through on our phones," Sullivan recalls. "We got texts from people: Hey, Lehman's going under, Lehman's going under."

Lehman Brothers — the giant investment bank — was about to go bankrupt. This was a cataclysmic event. Dan's eyes got wide. He started doing the math on a piece of paper, and realized he might make a million dollars the next morning when the new LIBOR number came out.

It was a total no-brainer that interest rates were going to skyrocket, he thought. LIBOR is an average of what big banks say they have to pay to borrow money, and a major bank was collapsing.

"They're supposed to be reporting what other banks will lend them money at, and if I were a bank, I wouldn't lend money to another bank at all that Monday," Sullivan says.

But Monday morning arrived. At 6 a.m., the new LIBOR number came out. And it was unchanged, as if nothing has happened. One of the biggest bank failures in history had just occurred, and you would never have known by looking at LIBOR.

For Sullivan, the lottery ticket that looked like a big winner was instead worthless.

"I was just dumbfounded that morning," Sullivan says. "I was like a deer in headlights. I can't believe what happened. And then it was only with hindsight that it started to become clear that they had just lied about it."

Now that emails have come out, with employees at Barclays bank talking quite openly about setting LIBOR for their own benefit, he says it's like salt in the wound.

"In hindsight, I wished I had walked out that day, and just never come back," Sullivan says. "After that, it's a frustrating experience to feel like you're just getting stolen from all the time."

Sullivan isn't trading anymore. But there are a lot of others like him out there. Many of them are suing, and they say they lost more than he did. There are huge pension funds and hedge funds and city governments that bought these derivatives. A war is brewing in the courts.

earleflorida's picture

BP's Tony Hayward now morphs into Barclays plc, Bob Diamond ___ We're Sorry :-(

l1b3rty's picture

Not to mention anything the "average investor" is in is decline. Mutual Funds getting slaughtered by the dark pools

RobotTrader's picture

Investor's Business Daily page A11 has two ratio graphs:


- Small Cap Growth Funds vs. Large Cap Growth Funds

- Value Funds vs. Growth Funds

Both graphs are showing the highest favor to Big Cap and Value funds, the widest divergence I've seen.

And here's the Shocker:

- SPY and DIA are within a stone's throw of 3 1/2 year highs

- QQQ not to far from 11-year highs

- Interest rates smashed to 60-year lows

- Commodity prices successfully jawboned down to low levels


- What happens when the economy improves?

- What happens after 9 months of sub-2% 10-yr. yields start taking effect?

- What happens when emerging markets come out of their slump, the same way they did after 1997 and 2004?

I'd say the bears better watch out.

AccreditedEYE's picture

There is so much debt in the global economy, growth rates are going to suck wind for DECADES. Wake up dude. Between that and demographics, all these Bulls expecting a return to the 80's-90's style equity ramps are setting themselves up for epic failure. Have some Kettle One, put on some 'Floyd and think about it. Game Over.

luna_man's picture



"I'd say the bears better watch out."...


And I'll say, "bears" have nothing to fear!..."Bullish" are you still?



BeetleBailey's picture


- What happens when the economy improves?

- What happens after 9 months of sub-2% 10-yr. yields start taking effect?

- What happens when emerging markets come out of their slump, the same way they did after 1997 and 2004?

I'd say the bears better watch out.


- The economy will NOT improve unless your dickhead "leader" Barry O'Regulate the FUCK out of business is out of office - and that's just for starters.

- The markets will TANK when the 10 yr. yields go up, as investors will finally get something for their money.

- Emerging markets LAG...............always. Get a grip.

No's the foolhardy bulls that better watch out

LooseLee's picture

When the economy improves? What a moron. Robo, you are a disgrace to the human race!

RobotTrader's picture

I'd say the amount of money lost on the tiny differential in LIBOR spread skimming is small compared to the horrific losses suffered by gold stock investors after fantastic blowups in names like NovaGold that blew up John Paulson's portfolio.

Seems like all the coal, metals, and mining stocks one by one are getting "Bre-X'd"

disabledvet's picture

Gold miners have been stinking up the joint. Sounds like they could use some CAT mining equipment. And a bank that isn't broke like all the one's in Canada that all just got downgraded.

jimmyjames's picture

I'd say the amount of money lost on the tiny differential in LIBOR spread skimming is small compared to the horrific losses suffered by gold stock investors after fantastic blowups in names like NovaGold


Of course--single out a miner to make your case-in spite of miners posting record profits (but didn't "beat the street") meanwhile raising dividends--but  i agree-no question about the decimation of gold miners for those who bought at the HUI highs and those who do not take profits along the way and buy the pullbacks--for others-the gold bull has been a good ride-

The lemmings are always wrong and what side of the gold trade does it look like the lemmings are on?


kevinearick's picture

those positioned to outperform in an environment of global slowdown


Labor’s Market Position, Drilling Rabbit Holes

“…99% perspiration and 1% inspiration.” Does that sound like capital or the middle class? Why would you accept capital’s definition of labor? They cannot re-boot the economy without your children, trained by you.

Legacy capital may convince the willing middle class socialists that labor is a derivative of capital, and therefore replaceable, as many times as it likes, but the result will always be the same, system bankruptcy. That is History.

Wait until government may no longer pay robots to breed robots, and then have your children. At that time, you will recognize the bridge components, and capital demand will far outstrip your supply.

Increase the frequency of external reality polling in your algorithm, step forward into the fear created by empire TV in each iteration, and you will see why others are unsuccessful over time. The only question is which laborers will make the cut, same sh-show, different dress.

Creating effective leadership is a process of example, but allow others to write as many laws, talk, as they like. When you net out empire, it’s all about developing seed, on the implicit side of the looking glass.

The empire is always in check, in the prisoners dilemma of its own constitution. Mate when you are ready to see the empire for what it is.

Capital, leverage in all its forms, is a derivative of labor. The former cannot exist without the latter’s interaction with nature. Socialism, all unearned distribution, is a derivative of capitalism. The former cannot exist without the big banks created by the latter.

Convicting capitalists or socialists for their operation is like yelling at your children for doing what you do, instead of what you tell them to do. Buy whatever you want, but caveat emptor. Labor is all about the process of price discovery.

The US citizen chose do declare war on Labor. That’s unfortunate, for the US citizen. Because the global economy is dependent upon the US citizen for artificial demand, it is also unfortunate for the global economy.

Because the empire certified a substitute teacher it called labor, to implement the Pavlov swap, and linked it to a dc electricity feedback loop, to deflate currency and inflate its balance sheet with a monetized tax base for the purpose, in a buffet-style utilitarian derivative Ponzi system, does not mitigate the responsibility of willing participants, now scurrying for cover, in the same proliferation of social law enforcement. Despite all the talk, the majority has not changed its behavior.

Because the empire thinks it is stealing Labor’s fruit does not mean that the tree of Labor is any way impaired, nor does it mean that the root system is in any way impeded from migration.

All elected and appointed representatives willingly participated in taking Labor’s children, through Family Law, to the benefit of artificially growing the middle class and capital. No problem; we were expecting the outcome. Have a seat…right on the X.

When gravity reaches your design threshold…

Every empire rests upon the relatively precarious foundation of Nature, which requires constant tending. If the majority wants to pay its labor $10/hr to buy a house for $300k, to grow additional finance and insurance revenue jobs for itself, that’s its business, but expect FIRE.

Every weapon has at least two edges, including a dc computer. War, between good and evil, is for teenagers at a horror matinee, but do as you like. The empire watches itself, growing its own prison, of willing masters and slaves, on TV. Life is a function of doing, exploring the unknown, which no law may be drafted to impede, and it is the business of Labor.

Do and learn. Free will is not rocket science; it’s fortitude. Democracy is counter-intuitive relative to empire TV feedback. Human behavior is largely a function of peer pressure. If you don’t like what you see in the mirror, move, change the channel. If the shoe fits…tyranny of the majority it is.

A job should set you free of empire, not imprison you to its credit feedback cycle, and it should only require 10% of your time, leaving 90% for the real work, raising a family effectively. Focus on strangers, orphans and widows.

Enterprise architects are not employable to troubleshoot the system by a corporate piece of paper, public, private or non-profit, standing in for the individual as a strawman. Only you can do that. Don’t shoot the messenger, with the increasing securitization of perceived anonymity, and expect a happy outcome.

That’s currency for you, just a war bond by another name. A battery is a battery is a battery.

Arnold Ziffel's picture

These growth missed the boat by not loading up on Zynga and FB.


Brother Sebastian's picture

Thanks to the market manipulators, the performance of the major indexes--INDU, RUT, NDX and SPX--has little to do with the performance of underlying stocks that make up those indexes.  And as for the performance of fund managers, "Bread that is cast upon water gets soggy and sinks." 

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