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An unprecedented market event, such as the Covid-19 crisis, should have been an opportunity for active management to shine. Instead, new research finds that most active U.S. equity funds underperformed during the crisis.

A new working paper from the U.S. National Bureau of Economic Research (NBER) examined the performance of U.S. equity mutual funds during the pandemic and found that “most active funds underperform passive benchmarks during the crisis.”

The research, which was conducted by a professor and PhD student at the University of Chicago’s Booth School of Business, looked at a 10-week period between Feb. 20, 2020 and Apr. 30, 2020.

Over that period, it found that almost three-quarters (74.2%) of active funds underperformed the S&P 500. The average underperformance was -5.6%.

The research also examined performance against a variety of other benchmarks and found that active funds lagged these other benchmarks too, although by a narrower margin.

For instance, it said that 57.6% of active funds underperform their FTSE/Russell benchmarks and 54.2% of funds underperform their prospectus benchmarks.

The average underperformance relative to the FTSE/Russell benchmarks was -2.1%, and -1.5% relative to the prospectus benchmarks.

“In short, active funds perform poorly during the Covid-19 crisis,” the paper said.

However, the research also found that funds with high sustainability ratings from Morningstar and funds with strong “star” ratings (also from Morningstar) tended to perform relatively well.

“We find that funds with [higher sustainability ratings] as of January 31, 2020 have higher benchmark-adjusted returns between February 20 and April 30, 2020,” the paper said.

Additionally, the researchers looked at styles and concluded that growth funds outperformed value funds during the crisis.

In terms of fund flows, the researchers found that during the crisis, active funds saw steady outflows that “largely continue long-term trends.”

“The outflows are rapid during the market crash but they continue, albeit at a slower pace, during the market rebound after March 23,” they noted.

As with fund performance, the research noted that funds with higher sustainability ratings did better than funds with low ratings when it came to fund flows.

“When reallocating capital across funds, investors favor funds with high sustainability ratings and funds that apply exclusion criteria,” the paper said.

“Our finding that investors remain focused on sustainability during this major crisis suggests they view sustainability as a necessity rather than a luxury good,” the research concluded.