Active bond managers are beating their passive peers by protecting portfolios from rising interest rates. Asjylyn Loder reports for The Wall Street Journal:
Higher-priced portfolios pieced together by active money managers are handily beating the cheaper index-tracking competition, largely because they are doing a better job protecting their portfolios from rising interest rates.
Investors have bulked up on passively managed portfolios since the financial crisis amid a steady drumbeat of evidence showing that most managers can’t beat the market, especially after fees. But fixed-income funds have consistently bucked that trend. Recent Morningstar research found that 70% of fund managers who pick and choose intermediate-term bonds are beating their passive peers. Only 36% of U.S. stock pickers can make the same boast.
This is particularly important now that fixed-income investments are facing the first prolonged period of rising interest rates in a generation. The Federal Reserve has raised rates three times this year, and another boost is expected in December. Even debt issued by the most creditworthy borrowers is sagging because rising rates undermine the value of outstanding debt.
Active money managers have been preparing for that eventuality, but index-tracking funds continue to load up on bonds that will suffer greater losses when rates rise.
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