Stock pickers don’t tend to beat indexes, but active bond fund managers do a little better, according to Morningstar.
About 84% of active bond fund managers outperformed in the one-year period ending June 30, 2021, compared to just 47% of active equity fund managers, according to a semi-annual Morningstar report.
Although the spread narrows over longer time periods – only 27% of active bond funds have outperformed their benchmarks in the past 10 years versus 25% of active equity funds – active management offers some benefits to investors fixed income, Pimco’s Jerome Schneider told CNBC’s “ETF Edge” this week.
As head of Pimco’s short-term portfolio management, Schneider oversees the world’s second actively managed bond ETF, the PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (MINT).
The flexibility to deviate from benchmarks is “an incredibly important differentiator” for active bond fund managers, Schneider said.
For example, in 2020 and 2021, many active bond fund managers were able to take additional credit risk as the Federal Reserve eased the pressure on the fixed income markets, he said.
However, with the Fed now indicating that it will start cutting its bond purchases and withdrawing monetary support, that additional risk could return if managers are not careful, he warned.
He pointed out that in 2008, in the midst of the financial crisis, only around 8% of the Bloomberg Barclays Aggregate Bond Index was invested in bonds rated BBB, the lowest in the investment grade category. Now they make up over 15% of the index, Schneider said.
“Just by holding the index, you have a lot more credit risk, which is not necessarily the right positioning to have in this current environment … with moderate growth and a variety of central bank policies creating a propensity to a little bit more volatility going forward, ”he said.
Agile active managers can help reduce and moderate that risk with the Fed’s interest rate timeline still cloudy, Schneider said.
Although the “era of low interest rates and low volatility is over,” short-term fluctuations could cause the Fed to be more patient than expected while waiting for supply chain disruptions and other inflationary pressures. are showing up in the markets, he said. noted.
“Our rate hike forecast is probably still 2023, maybe pushed back to the very end of 2022,” Schneider said. “Right now we think inflation is starting to moderate and that will give the Fed a little more leniency in terms of responding to current conditions.”