Think hedge funds are equipped with superior investing skills? According to recent data by Morningstar, that's far from the truth. Last year, 79% of large-cap fund managers underperformed the Standard & Poor's 500 index. That's the worst showing since 1997.
Here's why: "Annual expenses -- averaging 1.3% of assets for actively managed big-stock funds, vs. 0.69% for index funds -- hampered returns. Plus, besting the S&P is harder in years like 2011, when the biggest stocks in the index outperform the smaller ones managers tend to load up on."
The results hold true across and within most market sectors.
This information is not only disconcerting for the value investors place on institutional sentiment, it also brings skepticism to actively managed exchange-traded funds, like Pimco's new Total Return ETF (TRXT).
Business section: Investing ideas
It has been a long time since hedge fund managers have underperformed the S&P 500 index, and so far 2012 is looking much more promising.
To find large-cap stocks that seem likely to cash in value over the year we created a universe of stocks with market caps above $10 billion and with five-year projected EPS growth above 20%.
We then screened for positive institutional sentiment: net institutional purchases in the current quarter.
Do you think hedge funds will make better calls in 2012? Will these names help to achieve that goal? (Click here to access free, interactive tools to analyze these ideas.)
1. Companhia Brasileira de Distribuicao
3. lululemon athletica
4. Regeneron Pharmaceuticals
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity, all other data sourced from Finviz.
The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica and Salesforce.com. Motley Fool newsletter services have recommended shorting Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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