Do Active Managers Shine in Down Markets?

Equity markets got off to a rough start in 2008; total return was -6.0% for the S&P 500® Index, and many non-US markets fared even worse. It was the weakest month for the S&P 500® Index since April 2002 (-6.1%) and the worst January performance since 1990, when the monthly total return was -6.7%. Losses of this magnitude are uncommon but hardly unprecedented. January's performance ranks in the bottom 8% of all monthly periods since January 1926, finishing 74th out of 985 months. August 1998 (-14.5%), September 2002 (-10.9%), and March 1980 (-9.9%) were considerably worse.

We often hear the argument that active money managers add value by preserving capital more successfully in difficult markets. Fans of this approach claim that experienced active managers can adjust risk exposure in response to changing market conditions, while naïve indexed strategies have no flexibility to trim their sails when the storm clouds roll in and are doomed to poor relative performance.

If active managers possess the skills to heed the storm warnings, the evidence is hard to find in last month's mutual fund returns. Relative to the average US equity mutual fund, Dimensional buy-and-hold strategies generally outperformed their industry peers across a wide range of asset classes for the one-month period ending January 31, 2008.