Mutual and hedge fund favorites have taken a beating in the first quarter so far, dragging down most funds right along with them. Long-only and levered hedge funds were among the hardest-hit as the stock market favored stocks with low institutional ownership. At least one firm has highlighted that individual investors who have bet agaibet aga institutions have done well, and it’s easy to see why when we look at the extreme underperformance some of the big mutual fund and hedge fund favorites.

Mutual/ hedge fund favorites run counter to the market

The idea that Energy stocks will make a comeback is becoming less and less a contrarian view, particularly in light of the fact that the sector outperformed the S&P 500 last week. Energy climbed 4.6%, outperforming the index’s 2.6% gain; the good news for mutual fund and hedge fund investors here though is that we’re seeing signs that hedge funds are pouring into the sector. Health Care, which has held some key mutual and hedge fund favorites over the last year or so, was the worst-performing sector last week, sinking 1.4%.

Goldman Sachs analyst David Kostin and team report that Consumer Discretionary, Financials and Health Care made up about half of mutual and hedge fund portfolios and that each of these sectors have so far lagged the S&P 500 year to date. Health Care returned -7.9% year to date, compared to the S&P 500’s gain of 0.4%, while Consumer Discretionary has only gained 0.2%.

Meanwhile, mutual funds and hedge funds have been avoiding defensive stocks like those in Telecom and Utilities, but these sectors have outperformed the market by 16 percentage points, gaining 15.9%. The Goldman team expects the outperformance of Defensives stocks to continue for now, adding that about 60% of their mutual fund underweights and very important short positions are Defensives.

Large-cap core funds struggle, large core funds return solid performance