Monday, October 22, 2012
Shaun A. Pfeiffer (Associate Professor, Edinboro University) & Harold R. Evensky (President, Evensky & Katz) recently published an article entitled, Modern Fool's Gold: Alpha in Recession, Journal of Investing, Vol. 21, Number 3 (Fall 2012). Provided below is the introduction from their article.
Active portfolio management involves the selection of securities and market timing in an attempt to provide value to fund investors. It has been suggested that periods of falling securities prices provide opportunities for expert managers to locate underpriced investments. The notion that active mangers are better able to ear their management fees during recessions is cited in the literature (Moskowitz , Kosowski , and Glode ) as a justification for holding actively managed funds within a portfolio. This assertion has been subject to little scrutiny. In this article, we estimate the performance of active equity portfolio management across business cycles.
Our study attempts to answer to simple questions: Is active portfolio management performance superior in recessions relative to passive investing, and to what extent is performance persistent across business cycles? Our findings suggest that active portfolio management is not superior to a passive investment strategy in either expansions or recessions. We also find the persistence is weak across business cycles. Collectively, the findings support a low-cost passive investment strategy for retain investors across all business cycles.