PGIM Institutional Advisory & Solutions The Impact of Market Conditions on Active Equity Management



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Fundamental equity managers shine when you combine weak markets with dispersion

PGIM’s Chief Strategy Officer, Taimur Hyat, makes the case for active management on Bloomberg, and also discusses the role of alternatives in asset allocation and which strategies add the most value.

Since the financial crisis, investors have enjoyed generally benign conditions, with subdued volatility and strong markets - but active equity managers have remained under pressure. Yet this should not be surprising; history has shown a strong pattern of counter- cyclicality in manager excess returns relative to the equity market.

PGIM's Chief Strategy Officer, Taimur Hyat, on Bloomberg Markets discussing the findings in our research and how approaching market conditions are likely to favor active management.



In this study, we take a close look at the relationship between equity market conditions (defined by market returns, volatility, and dispersion) and active equity manager results. Focusing on the US large cap space, we analyze over twenty years of manager and market data to determine which set of conditions are associated with more or less favorable results for active equity managers. Our key conclusions:

  • Conditions that are conducive for active equity management have not been in place for several years, but investors should bear in mind that conditions do shift.
  • There is a strong pattern of counter-cyclicality in active manager returns, with stronger excess returns generated in weak markets.
  • Dispersion (the variation across stock returns at a given point in time) can also play an important role in outperformance, particularly for fundamental managers.
  • In general, we find active management to be most successful in periods of “differentiated decline,” when market returns are low and dispersion is high.
  • Quantitative managers are less sensitive to market conditions; investors seeking stability and consistency in outperformance across market environments should consider a combination of quantitative strategies across styles.
  • Fundamental managers tend to generate higher excess returns over time; investors that are tolerant of cycles and focused on long-term outperformance should focus on a combination of more highly-active, fundamental managers in growth and value.

Our objective is to provide investors with a better understanding of the relative importance of changing market conditions and the need to bear in mind that they can, and do, shift. There is a market for passive and active management, not one versus the other. PGIM’s focus is on helping long-term investors understand the dynamics and the fit of active management in their portfolios.



Karen McQuiston, CFA
Managing Director

Harsh Parikh, PhD
Vice President 

Sujian Zhi

​The PGIM Institutional Advisory & Solutions group advises institutional clients on a variety of asset allocation, portfolio construction, and risk management topics. 

  Learn more about PGIM Institutional Advisory & Solutions



Karen McQuiston, Head of PGIM IAS, quoted in Institutional Investor's article on how active managers deliver strongest results in down markets.

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