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Stock Picking Gets Trickier .

JULY 2, 2011.
Stock Picking Gets Trickier .

A year ago, stocks were moving in such unison that traditional fund managers couldn’t hope to beat the market. Now stocks are trading much more on their fundamentals—but managers still are having a tough time outperforming.

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The average large-cap fund has returned just 4.52% this year, according to investment-research firm Morningstar Inc., compared with the Standard & Poor’s 500-stock index’s 4.96% rise. And only 31% have outperformed their relative benchmarks in the first six months of 2011, less than the historical six-month average of 41%.

This, despite the recent collapse in “correlation,” or the tendency of stocks to move in the same direction as the market. The measure has dropped by more than 25% since hitting a 23-year high last July, according to investment firm Birinyi Associates Inc. Theoretically, that should mean more opportunities for managers to beat their benchmarks. When the correlation dropped by 20% in 2009, for instance, 59.5% of funds beat the S&P 500, according to Morningstar.

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