Active Fixed-Income Fund Management: There’s Nothing Passive About It

Should investors prefer an active investment fixed income investment management strategy over a passive fixed income investment strategy?

LM Capital Group believes that actively managed fixed income investment management strategies may meaningfully impact investors’ portfolios in five ways:

1. Active Management Has Historically Outperformed Passive Investing

2. Active Management Can Manage Duration

3. Active Management Can Mitigate Risk

4. Active Management Can Allocate Meaningfully

5. Active Management Provides Broad Market Opportunities

Active vs. Passive Investing

R-I-S-K. In the world of investments, it’s the four-letter word we each try to minimize. Active fixed income investment management has the ability to reduce some or most of the risks that often unknowingly plague passive investors.

Yet investors have piled into passive fixed income portfolios since the global financial crisis of 2008. As of December 31, 2016, the percentage of net assets in all U.S. passive taxable bond funds was 27%, according to Morningstar. By contrast, U.S. passive taxable bond funds comprised only about 11% of the total U.S. fixed income taxable universe ten years earlier.

In 2016 alone, investors put $147.8 billion into passive taxable bond funds and $46.3 billion into actively-managed taxable bond funds, according to Morningstar.

While passive investing has its potential positives—low fees, transparency, tax efficiency, and indexing—the strategy carries its own risks.

When the investment seas get rough the experience and judgment of an active portfolio manager is going to matter.

1. Active Fixed Income Management Has Historically Outperformed Passive

A passive fund can match the market—but it will rarely beat it. According to research by Morningstar, for the five years ended December 31, 2016, sixty-five percent of active fixed income managers outperformed their benchmarks. For the same time frame, only 37% of passive fixed income funds outperformed their benchmarks.

The median active fixed income manager has outperformed the median passive manager by about 50 basis points over the 10 years ended 2016, according to Morningstar. When compounded over time, this differential has produced meaningful long-term growth for active investors.