Morningstar: Actively managed U.S. stock funds performance in bear market

How are actively managed U.S. stock funds performing in the bear market?

March 23, 2020 7:48 PM

The bear market is baring its teeth. How are actively managed U.S. stock funds performing so far?

Not so well, according to Morningstar analyst Jeffrey Ptak, who reviewed fund performance from the beginning of the coronavirus-induced bear market on February 20 through March 12.

“Funds that beat the market in one period tend to lag in the next,” Ptak says. “Proponents of actively managed funds say the real value will shine through in a bear market. But the data we’ve seen so far doesn’t back that up. There has not been a lot of payoff.”

Slightly more than half active U.S. stock funds beat their indexes during the recent declines through March 12. But only 17% of active U.S. stock funds that have been in existence since December 24, 2018, beat their indexes in the rally and the subsequent downturn.

Here’s a breakdown of what Ptak found:

Inconsistent performance

52% of active U.S. stock funds beat their indexes during the first 16 days of the sell-off. However, only 29% of active funds beat their indexes during the stock market rally from the last week of December 2018 through February 19.

“An iron principle of markets is that funds tend not to see a lot of persistence [in quality of performance] over time,” Morningstar analyst Jeffrey Ptak says.

Active performance during rally and bear market: ‘Not confidence inspiring’

Less than one-fifth of 1,845 active U.S. stock funds beat their indexes in both the rally of 2019 and the subsequent bear market of 2020.

Two-thirds of the 950 active U.S. stock funds that beat their indexes during the bear market lagged during the preceding rally.

The data is “not confidence inspiring,” Ptak says. A caveat, he adds, is that it’s “not uncommon for even the best funds to suffer underperformance for certain periods.”

Best and worst

Small growth, large blend and small blend active funds performed the best during the bear market sell off through March 12.

Mid-growth, mid-blend and large growth funds performed the worst for the same period.

Large blend, mid-cap and small blend funds showed the biggest improvements in performance in the bear market compared to the previous rally.

Average excess return varied in sell-off

For active U.S. stock funds that beat their index, the average margin of outperformance during the bear market was 2.16%.

But the average excess return — the difference a fund’s return and its benchmarks’ return — among all active U.S active stock funds during the sell-off, including those that lagged their indexes, was much lower: only 0.16%.

Time periods matter

One-third of U.S. stock funds that beat their indexes in the bear market lagged during the rally. Their average margin of outperformance during the bear market sell-off was 2.34%.

However, because these funds lagged their indexes by an average of nearly 6% during the rally, they are still underwater since the end of 2018.

“It’s a misconception that for a fund to outperform over a long period of time it needs to consistently outperform over shorter periods,” Ptak says.