Active bond funds outperform passive peers
Active bond mutual funds and exchange traded funds (ETFs) have largely outperformed their passive peers after fees, according to PIMCO’s analysis.
The “Bonds are Different: Active versus passive management in 12 points” report, which looked at the performance numbers and contrasted equity and fixed income markets in the US market, found that bond funds were different from their stock counterpart and there were a number of explanations to this.
First of all, one of the main differences between the bonds and stocks was that in the bond market there was a large proportion of noneconomic investors.
Another explanation was the benchmark rebalancing frequency and turnover, as active bond funds and ETFs showed a tendency to largely outperform their benchmarks except when the cost of benchmark replication was prohibitive.
Also, bonds and stocks differed due to the structural tilts in the fixed income space, the wide range of financial derivatives available to active bond managers and security-level credit research and new issue concessions.
The report found that despite the general presumption of underperformance, more than half of the active bond mutual funds and ETFs managed to beat their median passive peers in most categories over the past one, three, five, seven and 10 years, with 63 per cent of them outperforming over the past five years.
In contrast, only 43 per cent of active equity mutual funds and ETFs outperformed their median passive peers over the past five years.
“Opinions in the active-passive investment debate have drifted poles apart over recent years,” the report said.
“At a macro level, we believe that a purely passive market would cause severe market risk and resource misallocations.
“Realistically, neither passive nor active investors can fully dominate at equilibrium.”
The authors of the report stressed that passive management had its virtues, however there was a reason according to them to believe that “unchecked, passive management may encourage free riding, adverse selection and moral hazard.”
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