Fixed Income

Fixed income has become a commoditized asset class, strategist says, Active fixed income strategies may offer investors numerous advantages over passive index strategies, providing enhanced risk-adjusted performance potential.

As the U.S. Federal Reserve (Fed) continues to raise interest rates and unwind its balance sheet, investors are re-evaluating their fixed income investment allocations. They still seek returns in this relatively lower yield, low-inflation environment, yet many have made a move to passive investing.

We believe active management for fixed income can better help investors realize their goals. The advantages become more significant as we consider the flawed nature of issuance-based fixed income indexes and the long-standing segmentation of indexed markets.

Active management can be used in any environment

We believe actively managed bond strategies can help manage portfolio risk while enhancing returns. Active sector rotation, bottom-up security selection and interest rate (duration) management can create opportunities for investors to add value that are simply not available in passively managed strategies.

It might be logical to assume that index mutual funds or index exchange-traded funds (ETFs) would match the risk and return characteristics of their benchmarks, but on average these products have exhibited lower returns and higher volatility as shown in Exhibit 1. On the other hand, actively managed mutual funds have historically outperformed their benchmarks while maintaining a similar risk profile, on average.

The return profile of active versus passive is even more pronounced when considering only those mutual funds with fees in the bottom half of the universe — which are the lower-cost share classes many investors own today.