A recent Bloomberg article highlights the first-quarter’s unusual volatility, and the underperformance of many active managers – a group one might expect to have gained in such conditions. The article notes that, so far in 2016, the S&P 500 “lurched lower by 10 percent in the first six weeks and still managed to close the first quarter in the green – the biggest such turnaround since 1933.” “The reversion in the second half of February was unreal,” says Craig Sterling of Pioneer Investments, but “it’s been a tough go for active managers” because “people were positioned very defensively and a lot of lower-quality stocks have rallied.” Sterling, who oversees a fund that beat 90% of its peers this quarter, continued: “If I had a do-over, I’d have paid more attention to the areas where things were getting a little less worse.”

Goldman Sachs data show that the stocks most held by mutual funds fell by 3.1% while the 50 stocks least held by such funds gained 5.3% — the biggest gap in three years. Further, based on Bank of America Corp. data, only 19% of mutual funds beat the S&P 500, which is the lowest percentage since at least 1998. Dispersion, which measures the swing in individual equities relative to the market, moved up to its highest level since 2012 with the average stock gaining or losing 12% above or below the market average. Momentum strategies explain part of manager’s underperformance, as the worst performing stocks in 2015 gained 8.2%, according to Bespoke Investment Group, while many of 2015’s top performers fell. David Kostin of Goldman observed that both momentum and stock selection explain underperformance, but suggested that “the question is after that performance, how do funds respond? Do they double-down or do they say the economy is growing and the tech sector will see revenue growth, or do they rotate into extremely expensive consumer staples stocks?” Michael O’Rourke of Jones Trading Institutional Services explained the performance differently: “This kind of volatility forces people’s hands, he said, “If people are underweight something, more people short it and in this volatile environment those names outperform because every time short people are caught off guard the first thing they do is reverse that move. And there’s no need to go out there and buy overweight if you’re already long.”