Fixed income investors who default to passive strategies are missing structural return advantages of active management, said Jonathan Murrell, senior portfolio manager at Bank of America Private Bank.
Speaking Wednesday morning at Fixed Income Leaders Summit in Boston, Murrell said active management’s advantages are structural and persistent and stem from inefficiencies in the marketplace.
Murrell noted that popular bond indices such as the Barclays Agg are incomplete in that they include only about half of the fixed income market – certain areas that aren’t index-eligible, such as securitized bonds, can boost returns.
Also, passive investors can be indifferent to total return and care more about other objectives such as matching assets and liabilities – this creates opportunities for active investors to be on the other side of return-seeking trades.
Overall, passive investors have taken on increased credit risk, duration risk and interest rate since 2008, and they are receiving only a modest yield premium that’s not commensurate with the risk, Murrell said. “You’re missing out on a large segment of the market, and you’re taking more risk,” he said.
Murrell cited Morningstar data that shows active management outperforms passive about 60% of the time. Management fees are a critical consideration, as lower-cost active managers tend to outperform higher-cost managers on a net basis.
Murrell outlined the importance of starting yield for fixed income returns, noting that current yields near 5% are much more attractive than levels of recent years.
Looking ahead, Murrell expects investment flows into active fixed income strategies to increase as return differentials persist.
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