A look at leaders and laggards during the last two bear markets highlights active-management challenge
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There’s more than one way for markets to fail. While all bear markets are triggered by stress, stressors can come singly or in combination by way of monetary policy change, political events, natural calamities, excessive valuations, and other factors.
The unpredictability of bear-market triggers has two major implications:
- Sectors can suffer to different degrees from one crash to another; and
- Active managers that successfully weather one storm may not do so well in the next
Chris Tidmore, senior investment strategist in Vanguard Investment Strategy Group, illustrated these points in a recent commentary featuring three comparisons of the dot-com crash and the recent global financial crisis. The first section dealt with returns in various market sectors and segments during the two events.
“When the tech bubble burst in the early 2000s, information technology, telecommunications and utilities were the worst-performing U.S. market sectors,” Tidmore wrote. “During the global financial crisis, REITs, financials and industrials were the ones to avoid. In fact, the REIT sector was the best-performing sector in the tech bubble's aftermath, and the utilities sector was one of the best-performing during the global financial crisis.”
According to Vanguard, the worst-performing equity sectors during the tech-bubble burst were information technology (-42.3%), telecommunications (-30.8%), and utilities (-23.6%). During the subsequent global financial crisis, the worst-hit were financials (-66.2%), REITs (-56.2%), and industrials (48.1%).
Next, he viewed the events using a nine-category framework that grouped US stocks into value, blend, and growth buckets, as well as large-, mid-, and small-cap segments. The tech-bubble burst dealt the most damage to large-cap growth stocks (25.1%) and the least to small-cap and mid-cap value (-1.8% and 0.4%, respectively). During the global financial crisis, large-cap growth was the best performer (-36.5%), while large-cap value stocks saw the most pain (-46.6%).
Finally, Vanguard looked at changes in active manager performance by taking all the US-domiciled funds that survived the dot-com collapse, bucketing them into performance quartiles, and looking at how the top performers ranked in the following bear market.
“The top-performing active managers after the tech-bubble burst were no more likely to stay in the top half during the global financial crisis than end up in the bottom half, or be liquidated or merged,” Tidmore continued.
He noted, however, that lower-cost funds tended to be more robust in their outperformance than their higher-cost peers. For example, top-quartile low-cost funds were more likely to stay in that top category (27%) compared to top-quartile high-cost funds (24%), and were less likely to fall to the bottom quartile (20% low-cost active managers vs. 24% of high-cost).
Tidmore also emphasized the importance of patience through underperformance, though that and finding low-cost managers don’t guarantee success. “But they do give you a better chance … than does searching for a manager who has the same winning ‘fingerprint’ in every bear market,” he said.
