Believing bear markets favour active management is a myth

During extraordinary times like this, when communicating with investors, it can be useful to use evidence, charts, quotes or other materials. This can help them deal with the noise they are exposed to in the mainstream media.

Today we’ll use a quote from the 2008 SPIVA (S&P Index vs Active) report.

In the report, they were examining the record of active managers who claim that bear markets are the time when they really shine, as they can go to cash or avoid poorly performing asset classes more easily. They further claim index funds guarantee that you fall with the market, so they are a bad choice during bear markets.

Let's sprinkle some evidence on that assumption.

S&P found that during 2008, while the markets were performing very poorly, in asset class after asset class active managers, on average, did worse than their benchmark index.

Here is a quote from the 2008 Indices Versus Active (SPIVA) scorecard: “The belief that bear markets favour active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.”

In 2008, 35% of US Equity Funds outperformed the S&P Composite 1500. In terms of other bear markets, only 45% outperformed in 2001 and 42% outperformed in 2002.

“The belief that bear markets favour active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.”

So the idea that active management is a guaranteed safe haven during turbulent markets is an inaccurate assumption. Sure, some will outperform. Some do every year, but not a majority.

Warm regards,

Ben Brinkerhoff
Head of Adviser Services, Consilium