Every year, investors eagerly anticipate the stock market's opportunities. However, according to BofA Securities, the year 2024 could prove to be a truly exceptional "stockpicker's paradise."
Seeking Broader Market Participation
Investors have been wondering if the stock market will see wider participation across various sectors, not just dominated by Big Tech. In 2023, a group of highflying tech stocks known as the Magnificent Seven played a significant role in driving overall market gains.
The Importance of Market Breadth
Market "breadth" refers to the involvement of a large number of stocks in the gains of the S&P 500 index. A broader market breadth indicates healthier and more widespread growth.
While broadening market participation remains elusive, Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, provides reasons for optimism.
Favorable Conditions for Fundamental Stock Selection
According to Subramanian, today's investment environment offers promising conditions for fundamental stock selection. Compared to private investments, public investments reflect higher rates and inflation while trading at historically low valuations relative to their private counterparts.
Additionally, the number of analysts covering public equities has decreased over time. Currently, there are about 17 analysts covering the average stock, down from the peak of 21 in 1989. Similarly, the number of active large-cap mutual funds has dropped by 40% since 2014.
These factors create a favorable environment for stockpickers. With fewer analysts tracking stocks, the potential for generating alpha through astute stock selection increases.
Active Managers: A Promising Outlook
Against this backdrop, active managers may find themselves well-positioned for success in the year ahead. It is important to note that historically, most active funds have delivered lower returns compared to cheaper passive alternatives over long periods of time.
Morningstar has identified several active stock strategies that have received high ratings. These include the Fidelity Blue Chip Growth fund, Oakmark Investor fund, and Primecap Odyssey Stock fund.
For instance, the Fidelity Blue Chip Growth fund, holding a four-star silver rating, achieved impressive returns of 55.6% in 2023 (including dividends). This performance places it among the best-performing large growth funds, outperforming 97% of its peers in the Morningstar category.
In summary, as we look ahead to 2024, the conditions seem to align favorably for stockpickers. With potential market breadth expansion and conducive factors such as higher rates and reduced analyst coverage, the stage is set for active managers to make their mark.
Semiconductor Stocks Thriving in 2023
Robby Greengold, a strategist for Morningstar, believes that if semiconductor stocks continue their impressive rally, a particular investment strategy will be highly advantageous. This strategy holds one of the largest stakes in the semiconductor industry, with approximately 17% of the fund's assets allocated to this sector.
Primecap Odyssey Stock Fund: A Long-Term Investor
While the three-star Gold-rated Primecap Odyssey Stock fund has lagged behind in recent years, Greengold emphasizes that the firm is committed to its long-term investment approach. They extensively research and select stocks, and their due diligence is regarded as exceptional.
Despite returning 21% last year, which was lower than the broader market and its peers, Primecap does not heavily invest in major market stocks. The portfolio managers adopt a benchmark-agnostic strategy, resulting in a disadvantage as mega caps outperform the rest of the market. However, Primecap stands out by placing a significant emphasis on biotechnology companies – a generally challenging but intriguing sector for active managers.
Oakmark Investor Fund: Impressive Performance
Favoring growth investments, the five-star Gold-rated Oakmark Investor fund, which follows a large-cap value strategy, delivered outstanding total returns in the previous year. The fund exceeded the broader market's performance and outperformed 99% of its peers in the Morningstar category.
Google's parent company Alphabet and e-commerce giant Amazon played a significant role in driving the fund's impressive performance. Contrary to what one might expect from a value-oriented fund, the Oakmark Investor team focuses on stocks that trade below their estimated intrinsic value, irrespective of their price multiples.
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