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Actives outperform in stress scenarios, research shows

Active_passive_roadsignsAmidst ongoing volatility sparked by the Covid-19 outbreak, a report has claimed that active equity managers have “significantly” outperformed broad markets during downturns over the last 25 years.

The research by StyleAnalytics looked at over 1,000 actively managed US funds from 1995 until this year and found that quality active managers not only beat passive investment during downturns, but that outperformance against the Russell 1000 index increased as market losses grew larger.

This was particularly the case during the worst four financial crises of the last quarter century, including the dot-com crash and the 2008/9 financial crisis.

“Conventional wisdom says that because passive investments have no awareness of tail-risk events while active managers do (or at least should), that good active management should outperform passive investments during times of market stress,” StyleAnalytics said.

In falling markets, similar to that which the industry has currently found itself in due to the coronavirus, the top quartile of active managers (by performance) outperformed the market 60% of the time, while the top 5% of managers beat the market 75% of the time, according to the research firm.

Downside risk protection was found to be a core benefit of top performing active equity managers.

A separate report published earlier in March, however, found that European stock pickers have been struggling to outdo their respective benchmarks, according to the latest data from S&P Global.

Despite “strong” market conditions, over 70% of European active equity funds underperformed the S&P Europe 350 index throughout 2019.

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