Over a full cycle, active managers have done well
First, the fair evaluation of any investment strategy should cover a full market cycle. A 2012 study from Robert Baird shows that while 59 per cent of active managers added value over one year, 73 per cent did so over five-year periods. This carries particular resonance today because of how abnormally long the current market cycle has become: Despite the recent sell-off, the S&P 500 Index hasn’t seen a bear market since the financial crisis ended more than nine years ago.
This means that since the market troughed in March 2009, one key area where active managers have proven expertise – providing downside protection – has been in less demand because of the rising tide that lifted most risky assets simultaneously.
Yet when the markets have not performed as well – such as during the 2000-2002 tech-market bust and the 2008-2009 financial crisis – our research shows that US large-cap active managers outperformed their passive peers by 471 basis points and 100 basis points, respectively.
One of the tools that helps active managers navigate storms before they strike is their ability to analyse corporate fundamentals of the securities they own. When volatility rises, active managers can underweight underperforming assets, or they can simply move money into cash. Passive vehicles, on the other hand, are at a disadvantage when markets get rocky: they not only fall in lockstep with the index being tracked, but there is a risk they will underperform after accounting for fees.