Stress-Testing Funds Through Two Bear Markets and Two Bull Markets

The 2008–09 bear market made a bonfire of financials stocks, but all the other sectors were hit fairly hard, too. In contrast, the 2000–02 bear market crushed tech stocks, but other areas held up fairly well.

Let’s look at what those bear markets tell us about some fund managers. The 2000–02 bear market has fallen out of the standard trailing return figures now, so I thought, “Why not add it back in?” We now have two big bear markets and two ensuing rallies to measure when we go back to March 2000, and I was curious to see which funds look best when viewed through that broad lens.

I only wanted active managers from the Morningstar 500 who were there at the beginning of that first bear market. I looked at funds by Morningstar Category versus an index fund on a total-return basis and on a risk-adjusted basis as measured by the Sortino ratio. Sortino isn’t too different from the Morningstar Rating for funds, but it does allow custom time periods whereas the star rating stops at 10 years.

What emerged is a better picture of funds that have delivered for investors over full market cycles. To be sure, there are no guarantees that past is prologue, but some solid funds rose to the top while others failed to keep up with a comparable index fund. For many, the path to better risk-adjusted returns was through superior risk-reduction rather than high returns, and that’s worth remembering this long into the current market rally.

Because I am focusing on funds with manager tenure over the whole period, I am skewing results to the positive side as poor-performing managers are more likely to have been fired. But I think this is a revealing look at those fund managers who have had the longevity to stick around.

Large Growth

So few large-growth funds are beating their benchmark lately that it is truly striking to see how many have beaten the

The common theme among the funds that have beaten the index by a significant margin is fundamentals. All of these funds stayed focused on deep research on company fundamentals, including valuation, and that helped stock-picking shine through. On the other hand, funds that chased hot trends or ignored valuation got crushed.

Also noteworthy are great stock-pickers at

As for the funds lagging the index fund, none are too far off, but Neutral-rated

Large Blend Once again, quite a few funds beat the index funds in an area where few expect it. Attention to valuations and strong stock selection set the winners apart. Some of those winners were big investors in financials, meaning they were stalwarts in the 2000–02 bear market but lagged in the 2008–09 bear market.

One quality-focused fund slightly lagged, however.

Large Value For value funds, the 2000-02 bear market was a cakewalk compared with 2008-09, which crushed many value funds that favored financials. Thus, you see great stock-pickers at the top, but this time underweighting financials was the key to success.

Phil Davidson had the most impressive risk-adjusted performance at his two Silver-rated funds.