"The Plexus analysis shows that actively managed funds tend to outperform index trackers when monthly equity returns are less than 2.27 percent a month. When returns exceed 2.27 percent, index trackers tend to outperform actively managed funds," says Pyper.

Further analysis of the monthly returns on equities confirms this observation. When the returns were divided between bear and bull markets (recovery phase and the subsequent rises), "it is clear that index trackers generally outperform actively managed funds in bull markets and underperform these in bear markets," says Pyper.

Looking at maximum returns per month, index trackers’ maximum returns per month exceed those of actively managed funds in both bull and bear markets.

According to Pyper, this is because active managers can include more defensive shares in portfolios and may have greater exposure to cash in times of negative market returns. "On the other hand, any cash required to maintain liquidity in portfolios (for withdrawals and trading) has a drag effect in times of strong positive returns," he says.

It makes little sense to argue

Another interesting observation is that the monthly market returns were less than 2.27 percent per month in 55 percent of the months and exceeded 2.27 percent per month in the remaining 45 percent of the months.

"It thus makes little sense to argue about which management style is better," says Pyper. "It is more meaningful rather to construct a portfolio that comprises a core of good active managers, including an index tracker that tracks a fundamental index to reduce costs, and a traditional index tracker to share in the strong returns it delivers in especially bull markets."

When investors become concerned about markets and want to defensively position their portfolio, they should switch the traditional index trackers to a combination of good active managers and funds that track fundamental indices. This is preferred to trying to time the market and continually switching between equities and cash.