Active bond managers better placed to outperform

In an environment of rising yields, active bond managers are better positioned to outperform, enhance portfolio returns and protect their invested capital in ways that typically are not available for passive managers, IOOF said.

First of all, with falling interest rates investors tended to chase higher yields by investing in longer dated bonds, which may lead to portfolio over-exposure to interest rate duration risk.

This would give active managers the flexibility to shift their portfolios to shorter duration assets to minimise capital losses.

Secondly, when considering corporate bonds, active managers tended to have greater flexibility to position the sector exposure, which would cushion bonds from the impact of interest rate rises.

At the same time, compared to the benchmark which had an allocation of over 50 per cent in government bonds, passive managers had no choice but to accept higher duration risk, low risk premia, and overall lower yields which resulted in poor benchmark performance.

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According to IOOF, active managers also had flexibility regarding the financial instruments they chose and which were the best suited to different interest rate environments. 

This would include more complex financial instruments and other options that were not available to passive managers such as interest rate derivatives, inflation linked bonds, credit options and investing in different international markets or adding currency investments to a portfolio.

IOOF’s portfolio manager, fixed income, Osvaldo Acosta, said: “2017 will be another challenging year for bond managers given that short and long-term bond yields have been re-priced higher as markets are expecting the Fed and Reserve Bank of Australia to move cash rates higher.

“Bonds will always play a key role in a diversified portfolio however, in times of rising interest rates, an active manager will be better placed to uncover better risk/returns.”