For years, we’ve heard how unfair it is to judge active managers in bull markets. That we should wait for more challenging times. So the argument goes, active managers’ risk management protects investors during downward markets.

An early assessment of the COVID-19 Crisis suggests that active managers, particularly the largest, haven’t delivered on this.

If, for now, we define the ‘COVID-19 Crisis’ as the period from market open on 24th February 2020 to close on 6th April 2020, the latest available ASISA statistics tell a grim story for active management.

Average Return of all ASISA SA General Equity funds -20.72%
Average Return of the Top 10 Active Funds by AUM -22.26%
CoreShares Top 50 ETF -18.59%
FTSE/JSE All Share TR Index (ALSI) -18.34%
% Active Funds underperforming Top 50 ETF 69%
% Active Funds underperforming ALSI 72%
8/10 underperform the CoreShares Top 50 ETF or CIS 80%
9/10 underperform FTSE/JSE All Share Index 90%

Source: Morningstar & CoreShares Asset Management. All returns are cumulative from the period 24th of February 2020 (market open) to 6th of April 2020 (market close). Past performance is not indicative of future performance.

Even though the S&P vs Active (SPIVA) report consistently shows that it’s difficult for active managers to beat their benchmarks over longer periods, investors often accept this underperformance because of the active houses’ risk management promise. Unfortunately, this simply doesn’t always happen.

Life becomes even more difficult for fund buyers because picking managers based on recent success is problematic. An example: the 2020 raging bull winner for best performance over 3 years ranks in the bottom 5th percentile over the crisis period.

The big-name fund managers also performed poorly. The Top 10 by AuM, making up approximately 49% of total AuM in the ASISA SA General Equity category, had a poor showing with an average return of -22.26% vs -18.34% ALSI and -18.59% Top 50 ETF. Only 1 in 10 beats the ALSI and 2 in 10 beat the Top 50 ETF (or CIS equivalent).

Does this mean all active management is broken? No. It’s a relatively short period on which to base an analysis. But looking back at major market corrections (for example, most active funds didn’t outperform during the Global Financial Crisis either), we need to be more critical of the old story that active houses deliver down-side protection. The argument for a large core allocation to passive investments is as strong as ever.

COVID-19 Crisis1. Active managers defined as all managers in the (ASISA) SA General Enquity category. Performance relative to the CoreShares Top 50 ETF from the period 24 Feb 2020 (open) to 06 April 2020 (latest close). Past performance is not indicative of future performance.