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Outperforming the market during times of crisis

As the U.S. economy locks down and asset prices tumble, highly skilled fund managers continue to mitigate the risk of losses and generate alpha.


  1. Q1 2020 saw record falls in the U.S. stock market, with the Federal Reserve returning interest rates to near-zero. Meanwhile, flows out of bond funds hit record levels.
  2. Large swings in asset prices create tactical opportunities for active managers, while passive managers demonstrate that staying invested for the long term generates returns.
  3. Successful funds are reliant on the knowledge and expertise of their managers, as epitomized by winners of the 2020 Refinitiv Lipper Fund Awards for the U.S.

Midnight, March 20, 2020. The end of an unimaginable week.

Within just seven days, the deadly COVID-19 has rapidly spread across the U.S. The number of reported cases has skyrocketed from 2,100 the week prior to 19,200. Fatalities have leapt from 37 to 258. These are the cases and deaths that have been reported to the authorities. The numbers are probably higher, many believe.

New York City has quickly become the epicenter of the crisis in the Americas: Mayor Bill de Blasio estimates his city constitutes 30 percent of U.S. cases. Its death toll tops one per hour.

Measures across the U.S. to fight the pandemic are inconsistent and uncoordinated. “It’s chaos,” laments New York Governor Andrew Cuomo.

Widespread withdrawals

Surrounded by the turmoil, Wall Street is spooked.

A health crisis is rapidly becoming a financial one, and a sell-off has already started. As the disease ravaged parts of Asia and Europe weeks earlier, investors began pulling out of companies they believed would soon tank, sending equity markets into free fall. In February, U.S. and developed international stock markets fell by 27 percent. A fall of 20 percent usually takes eight months to materialize. This bear market took just one — the fastest on record.

The Federal Reserve responds accordingly, returning interest rates to near-zero.

Back to the week ending March 20, the price of oil plummets to $22 a barrel from almost $69 a year earlier, and the CBOE Volatility Index hits an all-time high, soaring from 14.38 to 82.69 in just four weeks. Record fund flows reflect market sentiment. Questioning the creditworthiness of corporations ahead of a prolonged lockdown, investors withdraw from fixed income funds — taxable bond funds lose almost $56 billion, their biggest outflow on record, while municipal bond funds shed more than $12 billion. Equity funds overall lose almost $15 billion.

Amid the sell-off, highly liquid money market funds provide solace for investors. Inflows top $140 billion.

Watch: Delivering alpha during times of heightened volatility

The long run

While many in the market panic, some exert calmness.

John Barr, Portfolio Manager at Needham Funds, manages passive long-term funds that frequently encounter market downturns, but which over time generate alpha. “The average holding time for our funds is 10 years, so we look beyond any short-term impact,” he explained at the 2020 Refinitiv Lipper Fund Awards for the U.S.

Historically, asset prices rise over time. Between January 2010 and January 2020, the S&P 500, for example, more than tripled its value, despite several market corrections along the way. The median market performance two years following a correction is 45 percent.

Commonly, investors try to time the market, and withdraw their cash prior to a downturn. However, seldom is this achieved. Many mistime their exit and miss out on a market upturn — for instance, investors who exited the market during the week ending March 20 missed out on the near-20 percent upturn experienced a week later.

Investors should therefore choose an investment horizon and stick with it, irrespective of the volatility experienced along the way. “Patience pays off in the long run,” quipped Christopher Retzler, Portfolio Manager at Needham Funds.

Watch: Driving alpha through fixed income fund management

Tactical trades

Market volatility also presents an opportunity, as overvalued stocks usually fall to affordable prices. While it can be tempting to buy a wide variety of stocks when this happens, Barr said, investors must examine each opportunity with the same rigor as they would in less volatile times — ensuring that each purchase meets strict investment criteria.

Similarly, in the bond markets, near-zero interest rates significantly hamper the ability of fixed income funds to grow. To overcome the impasse, explained Jim Caron, Global Fixed Income Portfolio Manager at Morgan Stanley Investment Management, managers must be active in a market that is typically passive, and capitalize on tactical opportunities as they arise.

Whether an active or passive investor, the ability to outperform the market is a skill that only the best fund managers possess. The Refinitiv Lipper Fund Awards honors such firms and talent.

What’s to come for the markets and investors?

Robert Jenkins, Head of Lipper Research at Refinitiv said: “As the world’s population, markets, and governments react to the ongoing threat of the coronavirus, one can rest assure that portfolio managers are taking these and other factors of change into consideration and potentially rethinking how they position their portfolios across companies and sectors.

Only when we come out of this downturn will we fully know what changes are permanent and which were transitory, and we’ll also have a clearer view of which investment managers were best able to navigate these generational shifts.”

For in-depth insights and data on funds managed in the U.S. and elsewhere, visit lipperalpha.refinitiv.com.

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