Does active management really protect on the downside?

One of the enduring promises of active equity management is downside protection. While the long-run evidence often questions whether managers consistently add alpha, many advisers and investors continue to pay for perceived skill precisely because they hope it cushions capital during market stress. In this report, we compare two randomly selected Australian equity strategies, the First Sentier Wholesale Australian Share Fund and the Pendal Focus Australian Share Fund, across three major equity market drawdowns: the Global Financial Crisis (2008–09), the late-2018 growth scare, and the COVID-19 pandemic sell-off in early 2020.

The analysis focuses on four key measures: downside-capture ratios, maximum drawdown, volatility, and recovery speed. Together, these metrics offer a practical lens for advisers assessing whether active management truly delivers when it matters most.

Methodology

For each stress period, we calculate:

1. Downside capture ratio – the average return of the fund divided by the average return of the S&P/ASX 300 Accumulation Index in months when the index declined.
2. Maximum drawdown – the peak-to-trough decline in fund value during the period.
3. Recovery time – the number of months taken to regain the fund’s pre-drawdown net asset value (NAV) peak (measured from peak NAV to peak NAV).
4. Volatility – annualised standard deviation of monthly returns in the 24 months around each stress window.

Fund data has been sourced from FE analytics and is shown net of fees. The analysis benchmarks both funds against the S&P/ASX 300 Total Return Index.

Fund Profiles

First Sentier Wholesale Australian Share Fund

• Aims to deliver long-term capital growth by investing in a diversified portfolio of Australian listed shares.
• Style bias: fundamental, benchmark-aware, with quality and large-cap tilt.
• Historical positioning emphasises diversified sector exposure and risk controls.

Pendal Focus Australian Share Fund

• Seeks to outperform the S&P/ASX 300 over the medium to long term through bottom-up stock selection.
• Style bias: core-style portfolio with flexible sector allocations, often with conviction in financials and resources.
• Mandate allows for more pronounced sector and stock-specific bets than benchmark-hugging peers.

Results

Global Financial Crisis (Nov 2007–Mar 2009)

Q4 2018 (Oct–Dec 2018)

COVID-19 Shock (Feb–Mar 2020)

Interpretation

The evidence across major market stress periods shows that active management’s ability to protect on the downside is inconsistent. During the GFC, both First Sentier and Pendal experienced drawdowns that were only marginally better than that of the index, and recovery times were similar to that of the benchmark. In the sharp but brief Q4 2018 correction, the picture was even less favourable: both managers recorded deeper losses than the market. By contrast, the COVID-19 shock in early 2020 highlighted a more positive outcome. Both funds fell slightly less than the benchmark, and importantly, First Sentier recovered in roughly half the time it took the index to regain its peak.

Taken together, these episodes suggest that while active managers can occasionally cushion losses and accelerate recoveries, their protection is not systematic. The success of active management in downturns appears to be shaped by the nature of the shock and the positioning of the portfolio at the time, rather than by a consistent defensive edge.

Broader lessons for advisers

• Crisis outcomes are empirical, not theoretical. Style labels such as quality, core, growth, or value do not guarantee downside protection. Performance in stress windows is the most reliable indicator.
• Diversification across managers matters. Pairing a structurally defensive fund with a more opportunistic one may improve the aggregate portfolio’s path through crises.
• Persistence is key. Evidence from S&P Dow Jones Indices’ SPIVA research shows that most Australian large-cap managers underperform over long horizons. To justify active fees, downside protection must be consistent across multiple crises, not just a one-off outcome.

Conclusion

Downside protection is one of the strongest arguments for active equity management, yet it is also one of the hardest to prove consistently. By comparing First Sentier and Pendal through the GFC, Q4 2018, and the COVID-19 crash, advisers can directly test whether these managers delivered on their promise.

Nick Hatzis

Nick is a columnist for The Inside Adviser and an expert on research and portfolio construction.