Blog Bonds Are Different: The Active Advantage Most active bond funds and ETFs beat their median passive peers over the past 1,3,5, 7 and 10 years.
Ask an investor if most active bond funds outperform their passive counterparts and the response is likely to be "no." After all, if one investor beats the market, another must lag it. Active strategies incur higher fees, so the majority should underperform their lower-fee passive counterparts. Recent media coverage on the rotation from active to passive funds – although focused chiefly on the equity market – may only reinforce this perception. Our research suggests otherwise – at least for bonds, if not for stocks. As the chart below shows, the majority of active bond funds and ETFs beat their median passive peers after fees over the past 1, 3, 5, 7 and 10 years, with 63% outperforming over the past 5 years. In contrast, the majority of active equity strategies failed to beat their median passive counterparts during the period. Only 43% outperformed over the past 5 years; in every other period, the percentage is lower still. Bonds are different We believe the reason why active bond strategies have been more successful than active equity approaches for this period lies in the bond market's unique structure. Consider: Noneconomic investors make up roughly 47% of the $102 trillion global bond market. Central banks, insurance companies and other noneconomic investors typically have objectives other than generating alpha. Central banks, for instance, may buy bonds to weaken their currency or boost inflation and asset prices. Commercial banks and insurance companies may care more about book yield or credit ratings than total return. The result: noneconomic investors leave alpha potential on the table for active bond managers. The composition of bond indexes changes frequently. When fixed income securities join or leave an index, their prices tend to rise or fall as passive investors rush to buy or sell. Active investors seek to anticipate and profit from these changes. Bonds, unlike stocks, mature after a number of years, leading to more turnover in the bond market. New securities make up about 20% of bond market capitalization annually, compared with about 1% in equity markets. Importantly, they typically are offered at concessional pricing to drive demand. Yet these discounts are generally not available to passive managers, who tend to buy new securities when they join an index, often a couple of weeks after they've been issued. Structural tilts can be an important source of durable added value. Active managers, for instance, can target factors such as duration and exposures to high yield credit, mortgages, high yielding currencies and other sources of potential alpha. In short, informational efficiencies make beating equity markets difficult. But we believe that's not the case with fixed income, where noneconomic and passive investors pursue agendas that are not exclusively about total return. Put simply, bonds are different.
Economic Outlook Building Resilience Amid Global Risks PIMCO’s Global Advisory Board discusses the longer-term outlook for geopolitics, inflation, and other macro themes.
Blog July U.S. CPI Offers Some Relief, But Fed Also Watches Other Inflation Indicators Despite price declines in many sectors, the Federal Reserve may continue its hawkish approach.
Blog China’s Mortgage Boycott: Could Property Sector Cracks Lead to Systemic Risk? Our stress tests show the Chinese banking sector as a whole can absorb shocks from a severe downside scenario, but mid-sized banks and contagion pose potential risks.
Blog Agency MBS: Opportunities for Alpha in a Post‑QE World Agency mortgage-backed securities (MBS) have faced unique challenges in 2022, but these challenges also create attractive new opportunities for active management.
Blog Fed Aims for ‘Modestly Restrictive’ Policy to Counter Inflation The Federal Reserve affirmed its commitment to price stability, hiking its policy rate 75 basis points again and signaling more tightening to come.
Blog What China’s Recovering Supply Chain Means for Global Inflation Renewed growth in China’s manufacturing activity, coupled with softening developed market demand, should ease some supply-side pressures – but several other inflation risks remain prevalent.
Viewpoints The Human Factor: Using Behavioral Science to Improve Investment Decisions More optimized and rational decision-making processes can give investment committees an edge.
All Asset All Access All Asset All Access: Positioning Portfolios for Ongoing Inflationary Pressures Research Affiliates discusses their near-term inflation views and the implications for the All Asset investment portfolios.
Blog Staying the Course: Key Takeaways From Our 2021 Advisor Fixed Income Portfolio Review We examine key themes from our review of advisor fixed income portfolios over the past year.