Skeptics of the active approach often cite this argument: With information more and more readily available, markets are becoming ever more efficient and true alpha (or active return) is increasingly difficult to find.
We don’t believe that this is true today in fixed income markets. Indeed, we see abundant opportunities for active bond investors for two reasons. The crosscurrents different market participants create, alongside the nooks and crannies formed by a disparate investment universe, open up meaningful opportunities for harvesting alpha from the market, in our view.
The fixed income market is incredibly diverse, with market participants who come to the table with a multitude of objectives.
Central banks, reserve managers and liability-driven investors are all major participants in bond markets, but they are not all looking simply to maximize income and returns.
European Central Bank President Mario Draghi made this clear when he discussed the central bank’s asset purchase program in December 2016, noting “there is going to be a loss, but our mandate is to pursue price stability. It’s not to maximize central banks’ profits.” He suggested that the central bank seeks monetary policy, not profit, goals when operating in the bond market.
Other institutions may not eschew returns as overtly, but bond market participants such as pension funds and reserve managers do also look to the bond markets with a different angle than traditional bond fund investors. See some examples in the table below.
We believe these different objectives mean that greater-than-zero-sum opportunities can in fact be available, i.e., we can have transactions that further the objectives of the participants on both sides of a trade. Consider a price-sensitive investor selling a long-dated bond to a liability manager in a rising rate environment. The rate-sensitive investor reduces risk, while the liability manager finds an asset that meets future obligations.