New research published in a journal for fund managers deals a fresh blow to the idea that fund managers’ skill in actively managing portfolios can overcome the costs of their services in comparison with passively managed, low-cost index funds.
The study, published in the new issue of the Journal of Investing, examined 20 years of mutual fund performance data, tracking expansions and recessions both separately and collectively. Shaun Pfeiffer, a professor at Edinboro University in Pennsylvania and Harold Evensky, president of financial planning firm Evensky & Katz but also a professor at Texas Tech University in Lubbock, authored the study in the peer-reviewed finance journal.
The two researchers wanted to test the notion abroad that actively managed funds earn their keep through their outperformance in bear markets. The idea is that active managers can make defensive moves to protect a portfolio and preserve investor capital while passive index funds are prey to falling stock prices.
The academic research literature has been unkind to active fund management. Numerous studies, cited by Pfeiffer and Evensky (left), find actively managed funds’ average underperformance net of fees to be about 9% over a 10-year period.
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The two researchers found that active fund managers do indeed perform better in recessions than in expansions. While their performance in recessions is enough to overcome their higher fees, active managers underperform passive strategies in periods of expansion and over investment horizons encompassing both expansion and recession.