This is the big one; a bear market so fierce and unrelenting that it'll expose index funds for the dumb investments they are and allow active managers to show their quality.
Or maybe not.
I recently looked at how actively managed funds have fared versus similarly styled benchmarks thus far in this the worst stock market crash since the Great Depression. What I saw probably won't end up in any actively managed fund's marketing materials. While the typical active manager has beaten certain benchmarks from when the major market averages peaked on Oct. 9, 2007, through the end of January 2009, the victory hasn't been clear-cut. Also the typical stock-picker's inability to beat the Standard & Poor's style benchmarks in most categories undercuts the argument that active managers would hold up better in a severe downturn by favoring so-called higher-quality stocks.
Pyrrhic Victory Yes, the average active domestic-stock manager in most categories has lost less than most of their respective Russell and Morningstar U.S. style indexes during the time period. The stock-pickers beat the Russell bogies in six of nine categories--all but large growth, small blend, and small growth. They also defeated the Morningstar benchmarks in seven of nine style box areas--all but large blend and small growth.
And manager discretion may have mattered. The Russell and Morningstar indexes are purely objective. Though their style indexes sort stocks according to value and growth characteristics, they include all stocks in their given universes regardless of whether the underlying companies are profitable (e.g. high quality). That lets in some speculative stuff that could fall harder in bear markets. It also gives active managers a chance to beat the fully invested benchmarks by favoring the higher-quality stocks, or those that tend to be profitable and that have defensible competitive positions, or by holding more cash.
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