In theory, active fixed income offers the best of both worlds. It has all the inherent benefits of an ETF structure leading to more liquidity, transparency, and lower costs, but it still gives managers flexibility to find the best opportunities in the fixed income space. 

The category is seeing substantial growth in terms of inflows and new issues. Institutions and advisors are becoming increasingly comfortable with the asset class. Additionally, it’s well suited for this particular moment given the uncertainty about the Fed and the economy’s direction which should create more opportunities for alpha for active managers. 

The latest mega-institutions to jump on the trend is the Bank of Japan. The central bank is shifting $62 billion of passively managed fixed income into active management. It believes this will help it finetune the risk profile of their holdings. It’s also consistent with its recent policy to gradually let yields rise in an effort to combat inflation. 

In fact, this change in monetary policy is also contributing to bond market volatility. And, this jump in volatility is what is leading to opportunities for active managers that the Bank of Japan is keen to capitalize upon. The Bank of Japan is considered a trailblazer, so it will be interesting to see if other central banks follow suit and increase allocations to active fixed income. 

Finsum: The Bank of Japan is converting some of its passive fixed income holdings into active fixed income. Find out why and whether other central banks will follow.