Active Managers Are Shining Amid Market Volatility

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Despite the tough economic environment, active funds’ holdings have largely remained the same as they were pre-Covid in 2019. (Photo by TIMOTHY A. CLARY/AFP via Getty Images)

The volatile market has been the best environment for active fund managers to shine, and they have proved their value in the past months.  

As the stock market experienced one of its worst months in April, 54% of the large-cap active funds outperformed their benchmark, the Russell 1000 index.

They did that again in May, with an even higher percentage—56% of the group—beating the index, by an average of 11 basis points, according to Bank of America ’s monthly fund performance update.

The strong performance might mark a comeback of active managers, who have struggled with laggard returns and asset outflows over the past decade. Investors have been moving their money into funds that passively track an index, which often charge much lower fees and thus tend to generate better post-expense returns. 

The 56% beat rate in May was a fairly impressive record. To put the numbers in perspective, in 2021, only 40% of the large-cap managers beat the Russell 1000 benchmark, which was already the highest hit rate in three years and above the historical average of 36% since 2003.

Active managers’ tilt toward the lowly priced value stocks and high quality names have paid off, wrote Savita Subramanian, equity and quant strategist at Bank of America. High quality stocks in the Russell 1000—those with stronger balance sheets and stable earnings, among other characteristics—outperformed the low quality names by 4 percentage points in May. 

The divergence is even more pronounced for small-caps, where high quality stocks in the Russell 2000 are leading the low quality peers by 12 percentage points year to date.

Small-cap active funds, on average, have a 10-percentage-point overweight in high-quality names compared with the Russell 2000. That has helped 64% of the group outperform the index in May.

Meanwhile, passive funds—typically weighted by holdings’ market cap and thus chasing after market momentum—have seen a challenging year as some of their largest holdings tumbled the hardest during the recent selloff.  

Despite the changing economic environment and rising recession risk, active funds’ holdings have largely remained the same as they were pre-Covid in 2019.

Subramanian noted that active funds still overweight cyclical sectors such as energy and financials, while they underweight defensive sectors like healthcare and consumer staples.

“Increased economic uncertainty would argue for a shift to defensive sectors,” she wrote, “But we do see opportunities in some cyclicals that are beneficiaries of inflation and rate risk.”

Write to Evie Liu at