Have active managers proven their worth in the bear market?

You may have noticed that the markets are down this year. This is obviously bad news for investors. But there may be a small upside to this cloud for active managers who, as the cliché goes, can prove their worth in a sell-off. How many can claim to have done so? It is a problem that occupies the minds of many fund analysts and at least one of the Alexis.

Alex Rosenberg: I know you checked the numbers, so don’t hold your breath. Have active managers, as a group, actually proven their merit in the market decline we saw in 2022?

Alex Steger: Well, of course, it depends on what you watch and in what period etc, but here are some numbers, which were crunched by our colleague John Coumarianos using the data from Morningstar. Looking only at large-cap equity funds until Wednesday, there are some positive and negative numbers. High-value PMs can claim a win, with 210 out of 325 funds or around 64% beating the Russell 1000 Value Index. It was a decent picture in Large Blend, where 51% of the funds outperformed the S&P 500, but less impressive in Large Growth, where 37% of the funds are way ahead of the Russell 1000 Growth.

Rosenberg: And I remember seeing the headlines in the S&P performance report showing unusually strong performance for assets.

Steger: Yes, the Spiva report for the first half was released last week and for that period found that 49% of US large-cap funds had beaten their benchmarks, the best performance since 2009 (52%). For further context, last year it was only 15%!

Rosenberg: Aha, just like I always say, passive investing is just a trend!

Steger: Exactly, exactly, it would never last! Except … this relative outperformance hasn’t changed the direction of the flows. In the first eight months of this year, just over $ 500 billion was withdrawn from active funds, more than a fifth of which came from US equity funds, despite improved figures from active large-cap managers. Meanwhile, passively managed funds raised $ 763 billion with $ 194 billion earmarked for US equities, even in this bearish market.

Rosenberg: It must be frustrating for an active equity manager. What do you attribute it to? Do people switch funds when their funds are down (even if they are less than the benchmark) and most of the switches are in favor of passive funds? Or something else?

Steger: Clearly many of this year’s outflows are just people fleeing a declining market regardless of relative performance and likely going to cash in rather than another equity fund. Not sure why passive equity funds are still raising money. Are they the preferred options for those daring to buy the dip? Are passive investors better at staying on course? Morningstar’s study of “investor returns” (essentially if investors calculate the buying and selling of funds well) suggests that passive investors are no better at this than their active peers.

Rosenberg: Ready for a really tough question?

Steger: Safe. Make them come!

Rosenberg: Does the performance of active managers in this terrible market year provide us with incremental proof of the value of active management? In the endless theoretical debate among advocates of active management and passive management, this reinforces the argument of those who claim that active managers will perform better over the long term through their use of industry-wide and company-level analysis, inclinations of style, guided macro-allocation movements, etc.?

Steger: I feel a little guilty about bringing this up in the piece, but the whole active vs. the passive thing seems a little pointless now. We are all basically in the field of it depends on the category and what you are trying to achieve, right? But, to try to answer your question, even if this relative outperformance persists over a longer period of time, I don’t think you change your mind too much. Critics of active management might argue that much of the outperformance so far this year has come from funds holding more liquidity than the index. And it’s also important to look at which active funds have outperformed. For example, in Large Value – the most impressive of the categories we looked at – the average year-to-date $ 1 billion fund performance is -11.77%, even better than -13.17% of their benchmark but enough to get excited about. ? Of course if the funds where people actually have money do significantly better, that could change your mind.

Rosenberg: We close on a positive note. Are there any categories that have stood out for their performance?

Steger: Well, there have been good numbers (and by that I mean really positive ones) in the much maligned liquid alternative categories, with two of the six Morningstar liquid alternative categories averaging this year. Sure, that leaves four below, but even the ones in red are all way ahead of the S&P. The worst, options trading, is down 10%, about half the market. And the best, Systematic Trend, is up 20.9% and includes funds like Arrow Managed Futures Strategy, which is up about 60%, and AQR Managed Futures Strategy, which is up almost 40%.

Rosenberg: So the halts actually provided some of that downside protection we always hear about.

Steger: Yes, and unlike US equities (perhaps because the performance is significantly better than the market and perhaps because there are no passive options here) this performance was rewarded with flows. Funds in the six categories have won $ 25.99 billion in new money as of August, roughly half of all their inflows in the past three years and just under half of what they have grossed in the five years to 2022. Perhaps that run. to alternatives makes sense after all!

Wealth management: the book

Citywire readers may be interested in learning about a new thriller with the somewhat uninspiring title of “Wealth Management.” Written by longtime “Law & Order” writer Edward Zuckerman, this fast-reading novel tells the story of three former Harvard students who find themselves working in the financial sector in Zurich, which somehow appears to have become the world capital. of crime. Thanks to two nightmarish clients, these rather lazy (albeit stoned) Harvard Business School graduates find themselves embroiled in money laundering, terrorist plots, petty theft and many homicides.

Veteran consultants reading the book might quibble with a few details. At the beginning of the book, the troubles in a company called “Sterling Wealth Management” begin when one of the two main buys calls on an Italian index in anticipation of a planned bailout. The bailout was rejected by the German prime minister, sparking this headache conversation:

“The rescue was happening,” Majid said. “It was the only logical move. Our returns are under two percent … We need to get on the map.“On the map,” said Ron. Bloody wonderful. How much … how much … did we … have we … bet? “Majid did not reply …“Without cover?” Ron said.Mayid nodded.“Damn,” said Ron. “We call ourselves a fucking hedge fund!”‘I didn’t want to limit our advantage .’…‘So … if any of our customers want to redeem …’“We need more capital.”

There is a lot to do here (are they called hedge fund?). But rather than being fussy, let’s move on to a passage on the next page, where Catherine deals with a Holborn Bank wealth management client:

Half of his investment with Holborn, a five million dollar investment he had invested, on the advice of the bank, on Catherine’s advice, in low-priced shares of a company called Kemper Media that owned a troubled newspaper chain in the Midwest of the United States. .. The bank analysts had predicted that Kemper Media was ripe for an acquisition, and indeed a takeover bid had arrived, from a media conglomerate called Plenum, the consummation of which would produce [her client] a nice gain. But the deal hadn’t been concluded, at least not yet, and it should have been.

These two situations – a huge bet on a geopolitical event that appears to have wiped out the capital of wealth management clients and a half-portfolio holding in a single merger situation – are, of course, the double settings for murder and chaos to follow.

The takeaway for consultants and fund recruiters? Bad risk management not only makes you lose money, it kills you!

-Alex Rosenberg

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