Active managers have delivered little in the way of returns
above an index fund since the financial crisis, but investors
might not want to give up on them as a source of protection in
research from PGIM, the asset management arm of Prudential
Financial, finds that active managers deliver their strongest
results when markets are weak overall and there is a high level
of dispersion, or variation across the returns of individual
The market overall hasnt differentiated that
much between individual companies, making it harder for active
managers to pick winners, said Karen McQuiston, managing
director of PGIMs institutional advisory and solutions
group. But if there are cracks in the market, there will
be a lot more focus on fundamentals again.
McQuiston added that in looking at 20 years of data on
large-cap managers returns, researchers found that the
strongest pattern was how countercyclical performance has been
to the overall markets. PGIM also found that fundamental active
managers outperformed quantitative managers in weaker markets
with wide dispersion between stocks.
Investors should understand that in down markets,
thats where theyll get their excess returns,
said McQuiston, who was also one of the authors of the new
Fundamental managers have delivered higher levels of return
over time as theyre more distinctly counter-cyclical,
turning out their strongest relative performance when markets
are down. While more variable, fundamental managers may provide
some cushion against the downside in equity
markets, according to PGIM.
Quant managers also delivered excess returns in weak markets
with high dispersion, though they were lower than their
fundamental counterparts. Still, PGIM found that quants
provided more consistent performance across different market
environments than fundamental stock pickers.
McQuiston said the goal of the firms research was to
draw lessons for investors in constructing portfolios and how
to combine different managers. PGIM, for example, found that
investors desiring more stability in their excess returns over
time may want to lean toward more quant managers across styles.
For investors who want excess returns of at least 150 basis
points, they may want to mix fundamental growth and value
managers, with only some exposure to core managers.
High active managers in the fundamental space are
paying off, she said.