BofA: Retail investors are better at picking stocks than hedge funds

The "dumb money" might be smarter than some pros think, which is one of many conclusions by Bank of America Global Research strategists in a new annual primer of quantitative research.

"Smart" vs. "dumb" money

The first theme explored in the BofA report is whether retail interest in a stock serves as a reliable "contrary indicator." The strategists found that this isn't exactly true.

The team's data-driven analysis found that stocks with strong retail inflows tended to outperform their benchmarks over the following four weeks by 1.1%, compared with 1% of outperformance for stocks with inflows from hedge funds.

And stocks with high retail ownership have tended to outperform stocks with low retail ownership when markets are falling.

The BofA team found that over the long-term (since 1978), the Russell 1000 Value index has outperformed the Russell 1000 Growth index. However, growth outperformed value from 2007 to mid-2020, as the financial crisis and its aftermath led to a period where growth became the scarce resource. On an annual basis, growth has beaten value in six of the last seven years.

Value stocks also tended to put in their best performance during the first 12 months of a tightening cycle, outperforming the equal-weighted S&P 500 index by 7%.

In recent weeks, JP Morgan said that hundreds of billions of dollars of corporate buybacks should help put a floor under stocks during the second half of the year.

But Bank of America advised their clients that corporate buybacks haven't had much of an impact on equity performance historically.

"Some expect this earnings season's market volatility to be quelled by the resumption of buybacks after the company's blackout periods end. But the relationship between S&P 500 buybacks and index performance since 1986 is a minimal 0.07 R-squared," The BofA wrote.