Active managers may be getting a raw deal from the raw numbers. That is the conclusion of a recent academic study which finds that active managers regularly beat the market during a recession.
Robert Kosowski, lecturer at Imperial College in London and the study’s author, says a downturn is arguably when investors need the most from a fund because of employment issues or less money coming in from investments generally.
Numerous studies have found that average returns from actively managed funds lag the indexes they try to beat more often than not, but Kosowski says that underperformance is caused entirely by what happens during a bull market. Kosowski studied bull and bear markets from 1962 to December 2005 and found that the average actively managed fund beat its index by as much as 3% in a down market, but lagged between .5% and 2% when the economy is expanding.
One factor that appeared to help funds in a downturn is their apparent ability to pick the best stocks in a given sector, which do not fall as hard as an index that represents every company in the area.
If investors could time the ups and downs of the market, Kosowski said, they would get the most return from equities by being in actively managed funds in a recession and index funds in a strong market.