Financial advisers helping their clients ride out tough and volatile equity markets might be interested in reading a recent FundQuest study that found just five mutual fund categories generated positive real alpha in both bull and bear markets.
Funds that invest in emerging markets bonds, industrials, consumer staples, world allocation and foreign large growth all generated positive alpha regardless of whether the market was up or down.
FundQuest's "When Active Management Shines vs. Passive" report adds to the perennial debate in this industry over whether active or passive investment strategies are best. After studying more than 30,000 mutual funds, FundQuest concluded that the smart investor will take advantage of both approaches.
In March the Boston company studied more than 30,000 mutual funds' performance over a 30-year period from January 1980 to February 2010, looking at every fund's behavior pattern and performance over five full market cycles. Out of the 73 categories in the study, the investment research company recommended a neutral investment approach for 28 categories, an active bias for 23 and a passive approach for 22. "They both have their strengths and weaknesses. It is not all or none," said Jane Li, manager of investment and research at FundQuest, which released its report June 30.
Much comes down to the category of funds the investor is targeting and, in some cases, how much competition the fund manager faces in finding the best picks. In the consumer staples category, for instance, active managers held the advantage, but in consumer discretionary, which is more cyclical, it was harder for managers to predict how well certain funds would perform.
Also, active managers could exploit opportunities in small-cap and midcap U.S. equities, because companies in those categories don't get broad market coverage. This means a manager researching stocks where few others are looking is likely to find more outperforming funds, Li said. That partly explains why emerging-markets categories do so well. "Just sitting in a Boston office, you'll have no clue as to what is happening in Brazil," Li said.
