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Is This a Good Time for Active Management?
One of the enduring tropes about investment management is that some periods are more conducive to stock picker success than others. For example, you often hear about active managers blaming their inability to beat markets on a lack of cross-sectional dispersion in stock returns. Well, cross-sectional dispersion has been relatively high in the US lately.1 So, is now a good time for active management?
The relation between return dispersion and active portfolio performance is, of course, a testable hypothesis. To do this, we looked at US equity markets, which are the largest and have the most robust data on active managers. We first sorted all months over 2006–2025 based on whether cross-sectional dispersion in US stocks for that month was above or below the median. We then computed aggregate net returns for active US equity funds versus their prospectus benchmarks in each of these samples.
The results show little evidence there’s more low-hanging fruit for active managers in high dispersion months. In aggregate, active funds underperformed their prospectus benchmarks by about 10 basis points per month in such periods, a slightly larger shortfall than in low dispersion months.
Does this mean active management is not beneficial for turbulent markets? No. High volatility periods tend to be associated with higher trade costs. An active process with flexibility is potentially at its most valuable during these times. Strategies tracking indices may impose higher costs on investors when market volatility escalates.
So, back to the question: Is now a good time for active management? If your objective is to find mispriced securities, probably not now—or ever. But if the goal is better execution when things go haywire, the answer may be yes.
Exhibit 1
Average Underperformance for Active US Equity Funds, 2006–2025
Footnotes
- 1. Average dispersion over the 12 months ending in April 2026 was 95th percentile among rolling one-year periods since January 2006.
Glossary
Basis point: One basis point equals 0.01%.
Cross-sectional dispersion: A statistical measure of the variability of individual stocks’ returns.
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