Active managers should thrive in a crisis. While passive managers can only watch, active managers can get busy. But have they delivered?
- Active managers should be able to adapt their portfolios to sliding markets
- Liquidity constraints and market timing problems may prevent active managers taking full advantage
- Statistics suggest that active managers have delivered for investors during this crisis
At the start of the crisis, Aberdeen’s Keith Skeoch issued a rallying cry: “It’s time for active managers to show what they can do.” It should have been the moment for active managers to show their worth. As the dust settles on the crisis, have they emerged triumphant?
The logic behind active managers’ outperformance in a crisis is sound. The passive manager can do nothing but sit there, holding the oil majors or the airlines and watching as they slide. The active manager, in contrast, can retreat into cash, gold, utilities to defend investors’ capital. They can also take advantage of opportunities as panic selling leads to mispricing.
However, the picture is not as straightforward as it sounds. For a start, any rotation into defensive assets necessarily requires some skill at market-timing, which – as we all know – is notoriously difficult. When does the manager go in and when do they come out? Get it wrong and they miss the rally.
Then there is the problem of inflows and outflows. Fund managers may be struggling with outflows as panicky investors withdraw money from the market. This can hamper their ability to make changes to their portfolio at crucial moments; instead, they have to hunt for liquidity. There is also the problem that active managers are fallible: they read the market wrong, back the wrong management team or their analysis is faulty. They may be closet trackers.
Having said that, statistics suggest that they do a pretty good job during crises. A recent study by StyleAnalytics found that: “In falling markets, the top 25% of managers by performance beat the market 60% of the time, while the top 5% of managers beat the market 75% of the time.’ (https://www.styleanalytics.com/research-articles/active-beats-passive-in-down-markets/).
This study was done before the recent crisis, but the signs from this crisis are reasonably encouraging too. For example, over the past three months (to 16 July), the FTSE All Share is up 10.5%, while the average UK All Companies fund is up 12.2%. 181 out of 244 funds in the sector beat the All Share with the top funds more than 10% ahead.
As the first value assessments emerge, it is easy to kick active managers as not all funds will be adding value for money. However, it is worth remembering that active management is often a friend in a crisis.