Active Management Won't Save You In A Drawdown

It may be difficult to believe at the moment, but stock markets do go down. They go down regularly, and occasionally will go down by a lot. This is the trade off we have to accept even as properly diversified, sensible investors.

During one of these drawdowns, taking a “hands off” decision minimising approach can seem counter intuitive. Reckless even. The car feels like its skidding off the road - we need to grab the wheel!

Image credit: Shutterstock.

And one of the promises of the active management industry is that through skilful management, a firm can protect its clients from the worst of this pain by nimbly making adjustments on the fly. An option not open to those silly little “passive” investors who have to eat the pain.

But it takes more than a shiny brochure and some marketing spiel to convince us over here - so let’s dig into the numbers.

In each of the below charts, I have compared the performance of the global stock market (in blue) to the performance of the Investment Association (IA) Global sector (in red), during every notable drawdown since the year 2000.

The IA benchmark includes all of the funds available to UK investors with a global equity mandate (this includes index funds, but the sector is still composed mainly of “active” managers). If active management were able to better protect investors to the downside, we would expect to see outperformance for this sector during times of drawdown.

2025 - Trump tariffs

2022 - Inflation sell-off

2020 - COVID crash

2018 - Taper tantrum

2011 - European debt crisis

2007 - Global Financial Crisis

2000 - Dot com crash

So, in aggregate there is very little evidence that active management strategies, at least in the global equity space, do protect clients against the downside. So either way, we are going to have to eat the volatility - why not pay less to do so?

Of course, there will be individual funds that shot the lights out in terms of outperformance during each of these periods. I am not denying that. But based on a cold eyed, probabilistic assessment your chances of picking said funds lie somewhere between Bob Hope and No Hope.

What will actually save you during these dark times is not your portfolio strategy, nor your investment nous. It is your stomach.

Yes you should have a properly diversified, data-driven investing approach. Yes you should have a robust financial plan, with enough cash and low risk investments set aside so that you can leave your longer term investments alone during these inevitable periods of decline.

But ultimately it is our behaviour during such times that will determine the outcome we get. And the good news is that behaving well as an investor don’t cost a thing.

This week, in the interests of brevity I have only looked at the performance of active equity managers versus the broad market during times of drawdown.

Most folks approaching, or in retirement, will not be solely invested in stocks - and so next week I’ll be examining whether active fund managers with a flexible mandate add value relative to a simpler alternative during times of market turbulence.

Past performance is no guarantee of future returns. None of the above is intended to represent investment advice to any individual. If you have any questions regarding your specific circumstances, please consult a regulated financial adviser.