Fingerprints And Bear Markets: No Two Are The Same

by: Vanguard

Written by: Chris Tidmore

Years ago, after learning in school that no two fingerprints are alike, my kids spent weeks trying to match their fingerprints to other people to disprove their teacher. Besides the practical aspects of having a limited number of test subjects, they never came close to proving the teacher wrong (although they kept thinking they were right). While fingerprints do have similarities, trying to find two identical ones is near impossible.1

Much like the uniqueness of fingerprints, finding two bear markets that are identical is almost impossible. All bear markets involve market stress, but no two are alike. A variety of factors can cause them, including unexpected changes in monetary policy, political events, overvaluations, bank failures, natural disasters, wars, and deleveraging in various forms and combinations.

Trying to anticipate whether any of these possible catalysts will manifest and how they might affect equity markets has proved to be quite difficult. And it’s no different with professional asset managers, whose performances are also almost impossible to predict, as we’ll see below. However, we believe certain factors can improve the probability of success using active management.

Two bear markets, different fingerprints

To see how difficult it is to predict investment performance, we looked at the differences in returns of various market sectors and segments during the last two bear markets.

When the tech bubble burst in the early 2000s, IT, telecom, and utilities were the worst-performing sectors. During the Global Financial Crisis, REITs, financials, and industrials were the ones to avoid. In fact, REITs was the best-performing sector in the tech bubble’s aftermath, and utilities was one of the best-performing sectors during the Global Financial Crisis.

Performances of equity sectors during the tech bubble burst and the Global Financial Crisis

Source: Vanguard calculations

Notes: Calculations are based on the annualized returns over the relevant time periods for the various sectors. The returns of the REIT sector were calculated from monthly Dow Jones U.S. Select REIT Index returns. All other sectors calculated from monthly Standard & Poor’s 500 Index sector returns. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

The chart below compares the last two bear markets using a style-box framework with nine categories. During the tech bubble burst, large-cap growth was the worst-performing sector, while mid- and small-cap value outperformed by comparison. But during the Global Financial Crisis, large-cap growth was the best-performing sector, while large-cap value was the worst-performing sector.

Leaders and laggards changed when looking at the market from the nine-box framework

Source: Vanguard calculations

Notes: Calculations are based on the annualized returns over the relevant time periods for the segments of the market using relevant S&P index returns. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Challenges for active managers

Active managers, as I noted above, didn’t escape this unpredictability either. The top-performing active managers after the tech bubble burst were no more likely to stay in the top half during the Global Financial Crisis than end up in the bottom half, or be liquidated or merged.

We found this by taking all surviving funds after the dot-com implosion and bucketing them by performance quartiles. We then looked at how the top-performing quartile of funds performed during the subsequent bear market.2

By comparison, random outcomes would show that each quartile category collected a quarter of the observations. Without even assuming that a majority of the liquidated/merged funds would have been in the bottom quartiles, it’s clear that a given manager’s success in one bear market did not guarantee success in the next.

Choose the low-cost manager

An important aspect of our example about the challenges facing active managers is that it also illustrated that outperformance in lower-cost funds was relatively more persistent than that in higher-cost funds. This supports our research, which shows that historically, investing in lower-cost managers has offered the best chance of success across all situations.

Subsequent bear market performance of active funds ranked in the top quartile in the prior bear market

Source: Vanguard calculations, using data from Morningstar, Inc.

Notes: Subsequent bear market (November 2007 through February 2009) rankings for U.S. equity funds ranked in the top quartile during the prior bear market (September 2000 through February 2003) by the highest- and lowest-cost quartiles. The ranking takes all active U.S. equity funds in each of the nine-box Morningstar categories based on their excess returns relative to their stated benchmarks. Past performance is no guarantee of future returns.

Of course, you also need to have patience to weather the inevitable periods of underperformance that even the most successful managers go through. But even these guidelines regarding the importance of patience and finding low-cost, talented managers don’t guarantee success. But they do give you a better chance of using active management to help your clients successfully reach their goals than does searching for a manager who has the same winning “fingerprint” in every bear market.


1 Francis Galton, 1892. Finger Prints. London: Macmillan and Co. In this highly influential book, Galton calculated that the chance of two individuals having the same fingerprints was about 1 in 64 billion.

2 Funds that were liquidated or merged between the two bear markets or during the Global Financial Crisis fell into the liquidated/merged bucket.

Guidelines to successful active management.

Chris Tidmore

Chris Tidmore, CFA, is a senior investment strategist in Vanguard Investment Strategy Group, where he leads the team that conducts research and provides thought leadership on issues related to active management. Before joining Vanguard in 2015, Mr. Tidmore managed the Geneva Arbitrage Fund which focused on event-driven investment strategies. Before the launch of the Geneva Arbitrage Fund, he worked as an arbitrage trader and portfolio manager for a large family office. In addition, he was an options trader on the American Stock Exchange and prior to his work in the securities industry, he was employed as an auditor, providing audit, accounting, and consulting services. Mr. Tidmore has developed and taught courses in financial accounting, financial statement analysis, asset valuation, equity derivatives, trading, portfolio management, alternative investments, and CFA and CPA review courses. He earned a B.S. in accounting at the University of Delaware, and is a CFA® charterholder, CPA, and past president of the CFA Society of Philadelphia.

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