Study Finds Active Funds Flailed During Early Months of Crisis

A recent academic paper argues that active funds have not held their own against passively managed funds during the early months of the pandemic. Researchers from the University of Chicago noted that a “popular hypothesis is that investors are willing to tolerate … underperformance because active funds outperform in periods that are particularly important to investors.” However, the researchers found that active funds underperformed their passive benchmarks during the ten-week period between February 20 and April 30, 2020. They studied the daily returns of all U.S. active equity mutual funds during that period and found that 74.2% of active funds underperformed the S&P 500, with the average fund underperformance at −5.6% during the ten-week period, or −29.1% on an annualized basis. Using alternate benchmarks that are tailored to each fund’s investment style, such as the Morningstar-designated FTSE/Russell benchmarks and factor-model benchmarks, the researchers found that active funds also underperformed these fund-specific benchmarks, although by lower margins. The researchers, however, noted high returns of sustainable funds during the period, saying sustainability ratings were a strong predictor of fund performance.