With the S&P 500 index (SPY) up 3.1 percent year to date and mutual funds lagging with 2.9 percent performance, a recent Goldman Sachs Group Inc (NYSE:GS) research report looked beyond the headlines to explore a contrast in the underlying performance statistics.

While sector selection benefited large cap core mutual funds, it was individual stock selection that appeared to be the performance problem year to date. Such mutual funds should have benefited from exposure to utilities, consumer discretionary and energy sectors.

Is stock picking the problem, or is Fama’s efficient market hypothesis at issue?

The ability for a fund manager, be it the hedge or mutual fund variety, to consistently pick winning stocks has been questioned in some quarters.

Efficient market hypothesis taught by Nobel Prize winning University of Chicago Professor Eugene Fama dictates that stock prices are appropriately priced as market participants are sophisticated and informed and all have the same information. Fama’s theory does not negate the potential for stock picking to deliver accurate results, but rather calls into question the consistency with which successfully picking stocks can practically take place. A separate point to note, is that it is mathematically impossible for a large group of funds to constantly outperform the market – because these funds ARE the market – and when expenses and other costs are subtracted – they will return less then index funds.

Many academics and hedge fund practitioners, while not necessarily endorsing stock picking, have called into question Fama’s thesis. Perhaps the lead critic of efficient market hypothesis is MIT’s Andrew Lo, who likes to tell a now famous joke to explain his opposition.

An economist was strolling down the street with a companion when they come upon a $100 bill lying on the ground. The companion reaches down to pick it up, the economist says, “Don’t bother – if it were a genuine $100 bill, someone would have already picked it up.”

There is an opportunity cost to information, as some traders are documented to receive information and act on it before general market participants, apparently calling into question a key piller of Fama’s hypothesis.

Individual stock exposure of mutual funds

In terms of stock sector analysis, sector selection in utilities appears to be performing well while stock selection in the segment appears to be slightly underperforming. Mutual fund performance relative to stock selection in industrials,health care and Staples, Inc. (NASDAQ:SPLS) are positive, while long stock picks in discretionary, info technology and energy are under-performing along with general financial sector exposure.

Some of the popular stock picks in large-cap core funds include Oracle (ORCL), CBC, JPMorgan Chase & Co. (NYSE:JPM), and EMC Corporation (NYSE:EMC).  The large mutual funds are also underweight Facebook Inc (NASDAQ:FB), Intel Corporation (NASDAQ:INTC), GE and Pfizer (PFE), which has exhibited strong price trends higher during the previous four months.

Small cap core funds are notably overweight Emergent Biosolutions, which exhibited a strong price trend coming of the volatility that was the market environment of October 14, 2014. Likewise, Core-Mark Holding Company, another small-cap overweight holding, has exhibited strong upward trends in its stock price going back to May of 2013. On the negative size, small-cap funds were generally overweight Hallmark Financial Services, which appeared to enter a downtrend in its stock price starting in January of 2014.

Large cap value funds have been rewarded by their overweight DuPont, which also started a strong price trend higher in price on October 14, but such funds were punished by their overweight in Macy’s.  Large cap growth funds benefited from their overweight exposure to Biogen Idec Inc (NASDAQ:BIIB), which has been trending higher since late in November 2014, as well as exposure to Starbucks Corporation and Celgene Corporation, both of which started trending higher in price following October’s volatile stock market move lower and subsequent recovery.  Large cap growth funds have been underweight Altria Group, which has been strongly trending from the beginning of the year, as well as 3M Co (NYSE:MMM) Company, which has been on a strong price trend since early in 2013.

Stock sector selection key point in mutual fund performance

While the validity of stock picking and efficient market theory, some of the more controversial topics debated in financial and academic circles, wasn’t the focus of the Goldman report, it nonetheless highlights that, at least year to date, stock picking appears to be hurting mutual fund performance. Mutual fund were generally underweight Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN), among the major success stories thus far in 2015. However, mutual funds generally made the correct call by being underweight Yahoo! Inc. (NASDAQ:YHOO) and Exxon (XOM), which have struggled.

The report analyzed the exposure of 705 mutual funds with $1.8 trillion of assets under management. It noted that all investing styles and asset sized funds they review increased allocations to information technology while decreasing exposure to energy, utilities and consumer stock sectors.

There is good news for large funds. Year to date 82 percent of large-cap funds are outperforming the Russell 1000 value index, while only 11 percent of such funds beat the index in 2014. Large-cap core funds have shifted underweight health care in January of 2015. Within this sector, funds are overweight health care providers and services, while being underweight biotechnology, the report noted.