Active funds only beat passive in bull markets, research shows

Emerging market bond and small cap growth funds have been the best performers over the past 30 years, according to FundQuest's latest study.

The study has found that active funds have outperformed passive funds in the majority of bull markets over a 30 year-period from January 1980 until February 2010, which includes five market cycles.

FundQuest studied the performance of 31,991 US-based mutual funds and found that after adjusting for risk and fees, active management delivers superior returns in bull markets but underperforms in bear markets. 

According to the FT, the study found that on average active managers outperform by 0.66% in bull markets, but underperformed by 0.68% in bear markets. The 31,991 funds included 73 different categories, which FundQuest then matched to passive indices.

Out of these categories, equity strategies provided a median outperformance of 1.25% in bull markets, while bear markets underperformed by 0.97% in bear markets. Meanwhile fixed income US-based mutual funds held up slightly better in bear markets with a median outperformance of 0.24% but an underperformance of 0.15% in bear markets according to the research.

Strategies with exposure to small cap growth, Asia Pacific and precial metal stocks proved the most successful active funds over the 30-year period, while the largest outperformance came from emerging market bond and small cap growth funds.

In contrast, highly cyclical funds with exposure to consumer discretionaries and Latin American stocks were the worst performers.