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The Volatility of Active Management Do active managers reduce risk?
BY Tim Edwards

The long-term returns of active funds and their relationship to passive alternatives have been the subject of celebrated studies, famous bets, and endless debate. But returns are only one part of the picture; proponents of active investing increasingly emphasize their capacity for risk management, as opposed to return generation.

This paper examines the merits of such claims, along with how individual funds achieve higher or lower volatility than their benchmarks—and whether these tilts are persistent. Our focus is on the volatility of mutual funds available across Europe and the U.S. The general record shows that:

• Typically, active funds offered higher risk than comparable benchmarks—although not always and not in every fund category.

• There is persistence in relative fund volatility, particularly for the most and least volatile funds.

• The performance of high-volatility funds appears to stem from a bias toward higher-beta stocks.

• The performance of low-volatility funds appears to be driven by large cash allocations.

We have relied on the extensive database built over 14 years and across four continents through S&P Dow Jones Indices’ S&P Index Versus Active (SPIVA®) Scorecards. This is the first time S&P Dow Jones Indices has published solely on fund volatility, but the subject has strong echoes in the studies of the performance of active funds provided in our global SPIVA Scorecards.

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