Conventional wisdom says actively managed mutual funds beat the index during bear markets (and are thus better to hold than index funds). Not so says a recent study from Standard & Poor’s Index Services.
According to S&P’s research, just 38.9% of actively managed equity funds in Canada outpaced the S&P/TSX Capped Composite Index during the bear market from August 2000 to December 2002. In the U.S, only 29% outpaced the S&P 500.
True, actively managed funds can hold cash balances, shift into defensive stocks, etc. – so there is a presumption they would do better. In fact, the average return earned by active Canadian equity funds does exceed the index during bearish phases.
But this average return “reflects the strong performance of only a few funds,” declares Jasmit Bhandal, director of Standard & Poor’s Index Services. “The majority of Canadian Equity funds still underperformed their benchmark.”
8 Responses to “ Active funds better in bear market? ”
I’m curious if the cash being held by funds was being held before the bear markets started, or if the performance during the entire bear market phases is just reflective of them switching to cash shortly after a decline and the bear market continuing to decline much further during this time.
But what would be really interesting is to see who got back in when markets turned around and how many funds missed some of the better days the market has to offer.
It’s a moot point though. If underperformance exists over long periods of time, does it matter much what the performance is like on the downside? The market goes up 2 - 3x as often as it goes down (or thereabouts).
By WhereDoesAllMyMoneyGo.com on Aug 5, 2008
Preet
Were you able to access the study on their website? Maybe it was me, but I couldn’t. I had it emailed to me (and can email you a copy,if you like).
By Larry MacDonald on Aug 5, 2008
Thanks for the offer Larry - I was able to download it. Can’t wait to sink my teeth into it.
Cheers
By WhereDoesAllMyMoneyGo.com on Aug 5, 2008
Okay, I skimmed over it. They note that they have not deducted fund expenses from the index returns - it would be better to see the iShare returns for the ETFs that track these indices. For the active funds, it would be better to add back the embedded trailers of the mutual funds and further subtract the brokerage costs that are not included in the MER calculation.
This would provide for a more meaningful comparison.
By WhereDoesAllMyMoneyGo.com on Aug 6, 2008
The report can be accessed here:
http://www2.standardandpoors.com/spf/pdf/index/080508_Canada-BearSPIVA-Report.pdf
It may be difficult to compare the index performance with an ETF. XIC used to be the capped version of XIU and was introduced, if I recall correctly, in 2001 — well after the bear market was underway.
But, it is still valid to compare active funds with the TSX Capped Composite index because investors can track its performance today through XIC (the mandate of the original ETF was changed in 2005).
Active funds already have an advantage in bear markets because they keep some cash around. It is surprising that only 2 in 5 funds managed to beat the benchmark index, which has no cash holdings.
By Canadian Capitalist on Aug 7, 2008
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By stockresearchportalblog.com on Aug 8, 2008