“It is better to be lucky. But I would rather be exact. Then when luck comes you are ready.”
- Ernest Hemingway, The Old Man and the Sea
• Strong theoretical arguments and extensive empirical data support the view that we should expect most active managers to underperform most of the time. But most of the time is not all of the time, and most active managers are not all active managers. So it is reasonable to ask whether active performance tends to wax and wane.
• We examined fund performance in various market environments to see whether certain conditions correlate with better active performance. We found that active managers were particularly challenged in periods when dispersion was low, stock prices were rising, and market leadership came from extremely large stocks.
• Active managers seemed to perform less poorly in years when value and momentum factors outperformed. This suggests that managers, as a group, tended to include cheap valuation and historical outperformance in their stock-selection processes.