Why actively managed funds don’t outperform in bear markets

The idea that active funds should outperform in bear markets is logical and compelling. Sadly, it’s also wrong

Man and a bear
The bear will triumph
(Image credit: © Getty Images)

There’s a surprisingly durable marketing myth about actively run funds (whose managers try to pick and choose stocks to beat the wider market, rather than just tracking it, as a passive fund does) and bear markets. The myth goes something like this. “Passive funds are all very well during bull markets, when everything goes up. But what happens in a bear market? If you’re in a passive fund, then the value of your portfolio will just drop alongside the wider market. Far better then to be with an active manager, who can take evasive action, move to cash, and exploit the opportunities as they arise.” It’s a compelling argument, logical even. Sadly, an examination of the market data suggests it’s not true.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.