Is there active management alpha in recessions?

(MoneyWatch) Shaun Pfeiffer and Harold Evensky, authors of the study "Modern Fool's Gold: Alpha in Recessions," published in the Fall 2012 issue of the Journal of Investing, examined the performance of active managers in recessions and expansions to see if they did better in recessions, as some have claimed. They also examined whether or not there was persistence of performance across the business cycle. The study covered the period 1990-2010. The following is a summary of their findings:

• While active portfolio management isn't superior to passive strategies in either recessions or expansions, it does perform relatively better in recessions (the alphas are less negative).
• The three-factor alpha (beta, size, and value) across the business cycle was -0.78 percent. In expansions it was -0.66, and in recessions it was -0.50 percent.
• The four-factor alpha (beta, size, value, and momentum) across business cycles was -0.97 percent. In expansions it was -1.03 percent, and in recessions it was -0.43 percent.
• There's little evidence of persistence of performance across business cycles. There was strong evidence of mean reversion in performance with over 80 percent turnover in performance rankings across business cycles.

When considering the data, it's important to keep in mind that even index funds have costs. Thus, they should be expected to produce negative alphas, approximately equal to their expense ratio. Since the negative alphas of active management are greater than the expenses of index (and passive strategies in general), the findings should lead you to draw the same conclusion as did the authors. They concluded: "The findings support a low-cost passive investment strategy across all business cycles."

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