Do Active Managers Shine in Down Markets?
The U.S. stock market lost 9% in the first quarter of 2008, following a gain of 5% in 2007. However, domestic equities did regain some footing in April, finishing up 4% for the month. Although the first quarter loss was steep, there have been regular declines as long as financial markets have existed. And although market volatility is unavoidable, it is possible to reduce portfolio volatility by improving your asset allocation, which is especially important during difficult markets.
According to the Investment Company Institute, the global mutual fund industry has grown to over $21 trillion in net assets spreading across more than 61,000 individual funds, as compared to just over $46 million in assets in 1975. In addition to the diversification that mutual funds provide, one of the most prominent features of active funds is that they have a full-time, experienced money manager who has the knowledge to make informed decisions in response to changing markets conditions.
We often hear the argument that active mutual fund managers add value to shareholders by preserving capital more successfully during difficult times than passive or index managers. Fans of this approach argue that active money managers are able to adjust the risk exposure of their funds in response to market conditions, while more "structured" or "inflexible" investment management strategies are unable to mitigate losses when the equity markets begin to contract.
If, in fact, active managers do possess the skills to preserve capital when market conditions change, the evidence is hard to find in first quarter 2008 mutual fund returns. Relative to the average respective U.S. and international equity mutual fund, nearly all index strategies outperformed their industry peers across a wide range of asset classes for the three-month period ending March 31, 2008.
| Lipper Category* | Average Fund % Return | Benchmark Category | Benchmark % Return | Lipper Minus Benchmark |
|---|---|---|---|---|
| U.S. Large Cap Growth | -11.6% | Russell 1000 Growth Index | -10.2% | -1.4% |
| U.S. Large Cap Value | -9.5% | Russell 1000 Value Index | -8.7% | -0.8% |
| U.S. Mid Cap Growth | -12.9% | Russell Midcap Growth Index | -11.0% | -1.9% |
| U.S. Mid Cap Value | -9.3% | Russell Midcap Value Index | -8.6% | -0.7% |
| U.S. Small Cap Growth | -14.9% | Russell 2000 Growth Index | -12.8% | -2.1% |
| U.S. Small Cap Value | -7.0% | Russell 2000 Value Index | -6.5% | -0.5% |
| Int'l Large Cap Growth | -9.5% | MSCI EAFE Growth Index | -8.1% | -1.4% |
| Int'l Large Cap Value | -9.3% | MSCI EAFE Value Index | -9.7% | 0.4% |
| Int'l Small/Mid Cap Growth | -9.3% | MSCI EAFE Small Cap Index | -6.7% | -2.6% |
| Int'l Small/Mid Cap Value | -6.3% | MSCI EAFE Small Cap Index | -6.7% | 0.4% |
| Emerging Markets | -11.8% | MSCI Emerging Markets Index (net div.) | -11.0% | -0.8% |
| Real Estate | -1.2% | Dow Jones Wilshire REIT Index | 2.1% | -3.3% |
*Lipper, a Reuters company, is a global leader in supplying mutual fund information to asset managers, fund companies, financial intermediaries, traditional websites and individual investors. Their mutual fund benchmarking research provides insight into the performance of U.S. and foreign mutual funds across a broad spectrum of asset classes.
