Sunday, 28 January 2024 04:43

Conditions Are Ripe for Continued Active Fixed Income Outperformance

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Currently, fixed income investors can lock in yields that are in-line with the average, historical return in equity markets. According to David Leduc, the CEO, Insight Investment North America, this is a major reason we are in a new ‘golden age’ for bonds. 


Another reason to be bullish on the asset class is that most funds are deployed via passive strategies. This has increased liquidity and decreased transaction costs, while also leading to more inefficiencies which astute active managers can capitalize upon. 


Leduc believes that fixed income benchmarks are inherently flawed given that indexes are weighted based on debt issuance. The end result is that passive fixed income investors are overexposed to the most indebted companies.


In contrast, active managers can achieve alpha through careful selection in terms of value, credit quality, and duration. While passive funds invest in a relatively small slice of the fixed income universe, active managers have much more latitude in terms of securities to better optimize portfolios in terms of risk and return. One constraint for active managers is that some strategies are successful but can’t necessarily be scaled. Many err by simply sticking to duration positioning which increases near-term volatility.

Finsum: It’s a golden age for fixed income with bonds offering equity-like returns. Here’s why investors should favor active strategies especially as the risk of a recession grows.  


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