Blog_Sad_BearSo there I am, at a recent Loring Ward Conference during a break. We’d just wrapped up a presentation on Asset Class Investing that includes a number of slides on the challenges active managers have in consistently and predictably outperforming the market.
The content is powerful and inarguable. Still, as I’m getting some coffee, I hear one financial advisor say to another: “Okay, I buy all that info about active management, but what about down markets? I think that’s when active managers really show their value.”
I was saddened to hear this, but not surprised.
As the rationales for active management have steadily retreated, with more and more money invested passively, some active managers and their dwindling number of partisans have made a last stand around bear markets.
They claim that active managers have a distinct advantage when markets decline. The managers, so the argument goes, can get out of troubled stocks and sectors early and avoid the worst of a downturn.
Here’s the problem – as I shared with the financial advisor and his friend – the evidence just isn’t there.
Standard and Poor’s has been measuring the performance of active managers against their index counterparts for several years now. Their May 2009 Indices Versus Active Funds Study specifically focuses on the great and terrible bear market of 2008 and concludes that “the belief that bear markets favor active management is a myth.”1
In the same study, Standard and Poor’s identified similar results for the 2000 to 2002 bear market. In both that bear market and the one in 2008, a majority of active funds underperformed their respective S&P Index for all U.S. and international stock asset classes. In aggregate in 2008, actively managed funds underperformed the S&P 500 Index by an average of 1.62%2
One of the greatest challenges for active managers is the extreme difficulty in forecasting the economy or accurately predicting the market’s direction in advance. This makes it hard for them to anticipate bear and bull markets. In fact, Wall Street has a notoriously bad forecasting record: its consensus forecast has failed to predict a single recession in the last 30 years.3
Wall Street’s track record on predicting the direction of the stock market is similarly unimpressive.
If the experts can’t even predict recessions or the direction of the markets, it is questionable how active managers can successfully pick individual stocks, in bear markets or bull markets, especially since a stock’s performance is often very sensitive to economic and market conditions.
No one knows when the next major downturn will happen. But when it does happen, based on what we’ve seen historically, active management may actually cause more harm than good.
Now, can we just all go back to advising clients on what really matters?
Past performance is not indicative of future results.

2 Ibid.
3 New York Times, May 5, 2009