Active Managers Cannot Protect Investors from Bear Markets

All crystal balls are cloudy, which is why Warren Buffet concluded:  “The only value of stock forecasters is to make fortune tellers look good.”  Active investment firms tout their ability to protect investors from bear markets, but some of the largest demonstrated they could not even protect themselves.  If their money managers could protect investors, why did firms like Lehman Brothers and Bear Stearns go belly up and Merrill Lynch have to be rescued by Bank of America?  As evidence of their lack of ability to forecast events, consider that in 2008 Lehman spent $761 million buying back its own stock at an average price of $49.60 and Merrill Lynch spent $5.27 billion buying back its stock In 2007 at an average price of $84.88.

There is no reason to think that they would manage their clients’ risks any better.  Investors don’t need to pay large, Wall Street fees to have their money managed.  Large fees are only likely to make managers rich, not investors.

Large individual funds fall in the same category.  In 2008, the hardest hit sector was financial stocks.  Financials comprise a significant portion of the asset class of value stocks, so let’s look at the performance of some well-known actively managed value funds:

 

Value Mutual Funds

Active Managers	%
Legg Mason Value Trust	-55.1
Dodge & Cox	-43.3
Dreman Concentrated Value	-44.9
Weitz Value	-44.9
Schneider Value	-55.0
Columbia Value and Restructuring	-47.4
Benchmarks
Russell 2000 Value Index	-28.9
Russell 1000 Value Index	-36.9

Of course, some actively managed value funds beat the benchmarks.  However, how would you have known ahead of time which ones they would be?  As the SEC’s required disclaimer states:  Past performance is not indicative of future results.  Thus, the prudent strategy is to use only passively managed funds.