L4 BARRON’S•Funds Quarterly April 6, 2020
F
rom his office in Minot, N.D., Mike Morey isn’t seeing
much of the coronavirus pandemic firsthand. But as chief
investment officer of Viking Fund Management, a boutique
fund shop, he’s feeling the financial contagion. Investors
have withdrawn $9 million from the $620 million firm in
the past month, including $3 million from Integrity Divi-
dend Harvest , a conservative, dividend-oriented fund.
“The fear and stress are contagious,” says Morey, 33, who
pulls out a can of Lysol and wipes down door handles
when he gets into work, spending his days holed up
in his office. “We’re just trying to stay positive
and have faith that this will pass.”
Time to
Go Active?
Depends
On Where.
Active managers were supposed to shine as soon as the global
markets stopped marching higher in lock step. They didn’t. But there is
some room for active management—here’s how, and where, to look.
By DAREN FONDA
Illustration byMichal Bednarski
April 6, 2020 BARRON’S•Funds Quarterly L5Funds for a Choppy Market
Focusing on quality, dividends, and domestic demand in China has helped these funds outperform.
AUM YTD
Fund / Ticker (mil) Return CommentAB Large Cap Growth/ APGAX $9,600 -13.8%Emphasizing large-cap growth stocks, this fund could
outperform if investors continue to seek safety in qualityParnassus Core Equity/ PRBLX 15,200 -18.1Owns stocks with high sustainability ratings, high profitability,
and wide economic moatsIntegrity Dividend Harvest/ IDIVX 135 -20.0A large-cap value fund that owns dividend-paying stocks
in mature industries like utilities, consumer staples, andhealth careMatthews China Small Companies/ MCMSX 167 11.9China-focused fund that looks for stocks benefiting fromdomestic demand, including health care, cybersecurity,
and food companiesSource: MorningstarThe pandemic will pass: China and
other countries are getting back to
work after showing that it can be con-
tained, and it will eventually level off
globally. As it winds down, investors
may be left wondering: Did it pay to
stick with active managers through
the crisis?
If ever there were a prime time for
active funds, this is it: the first bear
market since the financial crisis, soar-
ing volatility, and a chance for stock
and bond pickers to prove they can
tiptoe through the minefields, adding
value over unmanaged index funds
that mirror the market.
So far, the early results paint a
mixed picture. U.S. equity managers
are trailing their benchmarks by an
average 1.26 percentage points since
the end of February, according to a
sampling for 240 funds by Bernstein
Research. Across all domestic equity
categories, 48% of funds outper-
formed from February 15 to March 31,
according to Morningstar. Small-
growth managers had the highest suc-
cess rate with 63% outperforming,
while small-blend managers fared
worst with 32% beating their bench-
mark. Most bond managers haven’t
kept up either. Just 21% of taxable
bond funds are edging their bench-
mark—a casualty of a steep plunge in
corporate debt. International stock
managers had a 30% success rate, and
42% of municipal bond funds outper-
formed, according to an early tally of
results. (See “What To Do With Your
Bond Portfolio Now” on page L8.)
“Proponents of active management
said the next bear market would be a
vindicating event,” says Jeffrey Ptak,
head of global manager research at
Morningstar. “But if someone was
waiting for active managers to roar
back, ithasn’t happened so far.”
Active Managers Need More Time
A few weeks of data aren’t enough to
pass judgement, of course. The mar-
kets are so volatile that a few big
swings can push managers into the
outperforming camp in a matter of
days. There’s still plenty of runway for
managers to outperform, and some
are holding up reasonably well, in-
cluding a few solid funds that Barron’s
found (more on that later).
Indeed, market conditions are ripe
for active managers. A key advantage
now is a wider dispersion between
stock returns—the spread between
winners and losers. Dispersion is now
at 2008 levels, according to S&P Dow
Jones Indices. Higher dispersion cre-
ates more opportunity for stock pick-
ers to outperform; if dispersion is only
2%, picking a few winners won’t add
much excess return; but if it soars to
20%, then a manager can be a hero for
picking the standouts. “If you’re a
good active manager, this is your mo-
ment,” says Craig Lazzara, global head
of index investment strategy at S&P
Dow Jones Indices. “A wide dispersion
doesn’t guarantee success, but if you
succeed it’ll be really impressive.”
Some studies support the idea that
high volatility and bear markets give
active managers an edge. A recent
study by StyleAnalytics, a fund-
industry consulting firm, found that
large-cap managers outperformed the
Russell 1000 index by an average of 27
basis points (0.27 percentage points) a
month during the most severe market
downturns since 1995. In falling mar-
kets, the top 25% of managers edged
the index 60% of the time while the
top 5% of managers beat the index 75%
of the time, the firm said in a report.
Yet investors shouldn’t read much
into these results. Even in years of
above-average dispersion, more than
half of active managers still trailed
their benchmarks, Lazzara says. Only
30% of domestic equity funds beat the
S&P Composite 1500 index in 2019,
the fourth worst performance for ac-
tive managers since 2001. High volatil-
ity and dispersion could improve re-
sults for active managers, but it’s still
unlikely to see more than 50% outper-
forming, partly because the market is a
zero-sum game (where one manager’s
gains are another one’s losses).
Part of the problem is that no two
bear markets are alike, so what
worked in the past may be less effec-
tive now. Active managers generally
did well during the bear market of
2000-02, for instance. Why? Because
the downturn was fueled by tech.
Value and small-cap managers who
steered clear of tech were able to out-
perform. And large-cap managers
who diluted their portfolios with non-
tech stocks did better than the tech-
heavy large-cap indexes.
Other bear markets have proved to
be more challenging. The global finan-
cial crisis wiped out larger swaths of
the market, reducing the excess re-
turns of even the top active managers,
according to StyleAnalytics. Outper-
formance dwindled even more in the
2011 and 2018 U.S. market corrections.
“I’m not convinced that large-cap
managers do so much better in down
markets to redeem themselves en
masse,” says Ptak. The general rule is
that indexes are harder to outshine
when the markets are rising and easier
to beat when they’re falling. But the
extent to which managers outperform
in bear markets usually doesn’t make
up for lost ground in rising markets.
Funds have a lot of catching up to
do. Two-thirds of the active funds that
outperformed in this bear market
trailed their index in the preceding
rally from December 2018 to February
- Their gains in the downturn
haven’t overcome the deficits they
racked up; consequently, funds that
are outperforming now are still lag-
ging behind their index since late De-
cember 2018, on average.
Funds With Downside Protection
If you go active, where might it pay
off? One tactic is to look for funds
with a low “downside capture” ratio.
A fund with a downside capture of
Still Missing
The Mark
Actively man-
aged funds were
supposed to do
better in a
market rout.
48%
of active funds
beat their bench-
marks in the first
six weeks of the
pandemic crisis.
A Mixed Bag
Active managers have not risen to the occasion in the way most investors would
have liked. Since the market peaked in mid February, only four categories had
more than half their funds beat their Russell benchmark through March 31.
Number of Funds Percentage of
Outperformed Total Funds OutperformersLarge Blend 193 352 54.8%Large Growth 160 367 43.6Large Value 175 309 56.6Mid-Cap Blend 45 102 44.1Mid-Cap Growth 74 171 43.3Mid-Cap Value 60 106 56.6Small Blend 60 189 31.8Small Growth 114 181 63.0Small Value 49 120 40.8Source: Morningstar Direct Data for Feb. 15 through March 31.