9 Bits of Conventional Wisdom You Should Ignore
Active Management Protects You From Bear Markets The New Finance: "Active management fails in all markets."
The 2009 Spring/Summer issue of Vanguard Investment Perspectives provides us with evidence on the performance of actively managed equity funds during bear markets. Vanguard's study covered the period 1970-2008 and examined the returns of active funds during the seven periods when the Dow Jones Wilshire 5000 Index fell at least 10 percent and the six periods when the MSCI EAFE Index fell by at least that amount. Despite acknowledging survivorship bias (poorly performing funds disappear and are not accounted for), Vanguard found:
- It didn't matter whether an active manager is operating in a bear market, a bull market that precedes or follows it, or across longer-term cycles. The costs of security selection and market timing proved a difficult hurdle to overcome.
- "Success" can be explained at least in part by style exposures. For example, during the bear market of September 2000-March 2003, the Russell 1000 Value Index fell just 21 percent, while the U.S. total market lost more than 42 percent. Once active funds were compared to their style benchmarks there was no consistent pattern of outperformance. Past success in overcoming this hurdle didn't ensure future success. The degree of attrition among winners from one period to the next indicates that successfully navigating one or even two bear markets might be more strongly linked to simple luck than to skill.
Photo courtesy of AZRainman and www.azrainman.com on Flickr.
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