With the craze over index-based investing continuing to gain momentum, there is one asset class where active management still reigns supreme. That is in the fixed-income space. Barron’s reports that according to a recent PIMCO study (yes there is a conflict there) the majority of actively managed bond funds have beaten their passive peers over the past one, three, five, seven, and ten years after fees. A full 63% have outperformed over the past five years.
There are many reasons indexing shouldn’t be viewed as your first choice for bond investing, but one of the reasons cited by PIMCO, for the strong performance of bond managers (other than the fact that they are all obviously from Lake Wobegon) is that almost half of the actors in the bond market are “noneconomic” players.
Mattu says that one reason for the difference is that roughly 47% of the $102 trillion global bond market is made up of “noneconomic” players, such as central banks and insurance companies, whose objectives aren’t returns, but rather policy aims or matching liabilities with assets. Fewer investors playing to win gives an advantage to active managers. There are technical reasons, too: Unlike major stock indexes, bond indexes change composition frequently. Active investors can take advantage of temporary moves caused by passive investors being forced to buy or sell to match the changes.
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Jeremy Jones, CFA
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