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Rekenthaler Report

Don't Believe Everything You Read

Yes, fund investors pay attention to bear markets!


Listening to the Bear
Last week, three professors (Gottesman, Morey, Rosenberg) released a study finding that retail mutual fund investors don't favor managers who outperform during downturns. Entitled Is There an Incentive for Active Retail Mutual Funds to Closet Index in Down Markets? Fund Performance and Subsequent Annual Fund Flows between 1997 and 2011, the paper concluded that active fund managers would be wise to copy market indexes during bear markets, because investors don't reward the relative winners. Therefore, write the professors, there's little incentive for managers to deviate from the benchmarks in downturns. They should, as the term goes, "closet index."

My immediate reaction was suspicion. My reaction one week later after reading the paper and conducting some informal analysis: suspicion confirmed.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.