Bear Market Would Deliver Death Punch to Active Funds

A recent Bloomberg article warns that, while active fund managers are tempted by the thought that a market downturn would allow them to showcase their talents to investors—that a “human hand” is better than the ‘dumb’ passive funds that investors have favored—”it would actually be the worst possible situation for them and likely result in a messy and hurried consolidation of the entire industry like nothing we’ve seen before.”

The article asserts that the such an event would damage the large asset base that has, so far, protected active managers against the huge shift of dollars to index investing:

Up until now, healthy stock market returns have served as a partial offset to decreases in deposits with active fund managers. A market downturn would upset that balance, the article says, and “the second whammy would come courtesy of panicked investors.” Add to the mix the fact that, when agitated investors decide to get back into the market, “their money tends to flow into dirt-cheap index products.”

It’s possible, the article says, that some active funds will outperform in a “brutal drawdown” but is highly unlikely because even the strong performers are feeling outflow pressure. “Managers are stuck playing a game of staying close to their benchmarks if they want to maintain or gain assets. On the flip side, they tend to get blamed if they don’t sidestep the downturn. It’s a wicked conundrum.”