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Rekenthaler Report

Where's the Payoff for Active Investing?

Active U.S. stock funds haven't dodged the downturn.

The Insurance Premium
Active U.S. stock funds can't be expected to keep up with fully invested indexes during rallies, and they can't be expected to beat them in choppy markets, when there is no discernible trend to exploit. But active funds certainly can--and will--outperform through prolonged downturns, thanks in part to the cash that they typically carry and in part to defenses that they erect as the decline extends.

So runs the typical defense of active management. It was the most common argument supporting active management even before the 2000-02 tech-stock crash. Afterward, it became omnipresent, as many actively run funds did trounce the indexes during that stretch. Active stock funds were marketed as insurance; they charged a premium that would be wasted during ordinary times but that would pay off when the storm arrived.