Bond funds turning tide for active


By Daniel Paperny

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While the age old debate between active and passive strategies continues to place greater strain on the performance of active managers in a climate of low growth and low returns, the recent performance of active bond funds suggests a different story altogether, according to PIMCO.

In a blogpost this week, PIMCO global head of client analytics Jamil Baz noted that the majority of active bond funds and exchange traded funds had bucked the trend in recent years, with 63 per cent outperforming their passive peers over a five-year period.

Additionally, research data by PIMCO found most active bond funds had beaten their median passive peers after fees over the past one, three, five, seven and 10-year periods, with the data correct as at 31 December last year.

“We believe the reason why active bond strategies have been more successful than active equity approaches for this period lies in the bond market's unique structure,” Baz said in the blogpost.

“Informational efficiencies make beating equity markets difficult. But we believe that's not the case with fixed income, where non-economic and passive investors pursue agendas that are not exclusively about total return.”

Baz noted while active strategies were often thought of as underperforming their passive counterparts due to the higher fees involved, retail investors should note that the constant reweighting of bond indexes as different bonds matured could affect the performance of the bond market in unique ways.

“When fixed income securities join or leave an index, their prices tend to rise or fall as passive investors rush to buy or sell; active investors seek to anticipate and profit from these changes,” Baz said.

Another reason why active bond strategies have been more successful than active equity approaches arises from the fact that structural tilts represent an important source of added value, Baz added.

“Active managers, for instance, can target factors such as duration and exposures to high yield credit, mortgages, high yielding currencies and other sources of potential alpha,” he said.

Baz also noted central banks and other non-economic investors, which comprised 47 per cent of the global bond market, typically had objectives other than generating alpha – such as book yield or improving credit ratings instead of total return.

“The result [is that] non-economic investors leave alpha potential on the table for active bond managers,” Baz concluded.

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