Displaying items by tag: active management

Active fixed income demand is surging. The secular drivers are increased comfort and adoption by advisors and investors with the category, in addition to the conversion of actively managed fixed income mutual funds into ETFs. From a cyclical perspective, the current environment, which has attractive yields but considerable uncertainty about the Fed and economy, also favors active fixed income strategies.

Despite its growth, active fixed income makes up less than 4% of allocations, revealing that there is more upside. As long as the Fed remains in a wait-and-see mode, active fixed income is likely to remain in favor. And this period of uncertainty has certainly been extended following the recent string of robust inflation and labor data. 

This type of rate environment requires a more flexible and agile approach, which is better suited for active fixed income. According to Bryon Lake, JPMorgan Asset Management Global Head of ETF Solutions, “To me, it’s all about active fixed income. With what is happening in the rate space, investors are all rethinking their fixed income allocations as we speak. We want to talk about active fixed income … where investors can dial in the exposures that they’re looking to get in the ETF wrapper.”

Finsum: Current uncertainty about the timing and number of Fed rate cuts in 2024 has been a major contributor to the growth of active fixed income. And this uncertainty has increased following recent economic data. 

In March, inflows into active ETFs reached a new monthly record of $26 billion. It’s somewhat counterintuitive given the strong performance of global equity markets, which tend to favor flows into passive funds. 

For the first quarter, total inflows into active ETFs reached $64 billion, a new quarterly record. YTD, 32% of ETF inflows have been into active ETFs, despite accounting for only 7% of total ETF assets. Based on the current pace, active ETF inflows should exceed $200 billion this year, a more than 50% increase from last year’s record of $130 billion.

A key factor behind the growth of active ETFs is a desire to reduce exposure to mega cap tech stocks, which account for an increasingly large share of popular market-cap, weighted indices. And this has only been exacerbated in Q1, with these stocks tacking on double-digit gains. 

Additionally, there are concerns that financial markets could get choppier given uncertainty around monetary policy and the economy. This is leading many market watchers to believe that we are shifting to a new market environment, which should favor lagging stocks and stock-picking strategies over passively holding indices. According to Noah Damsky of Marina Wealth Advisors, “We think a more active approach is appropriate as we anticipate more choppy markets with upcoming rate cuts by the Fed. We’re making active tilts in our portfolio to laggards such as health care, and over time we anticipate increasing exposure to utilities as rate cuts draw nearer.”

Finsum: Inflows into active ETFs reached new records in March and the first quarter. Active ETFs account for only 7% of total assets. So, it’s impressive and telling that 32% of ETF inflows were into active ETFs in Q1.  

Morgan Stanley expanded its ETF lineup with the introduction of the Eaton Vance Total Return Bond ETF (EVTR) and the Eaton Vance Short Duration Municipal Income ETF (EVSM). The bank is joining many of its peers in converting fixed income mutual funds into active fixed income ETFs. 

EVTR focuses on seeking total return through diversified investments in fixed-income securities, including corporate, municipal, U.S. government, and asset-backed securities. EVTR is actively managed and has an expense ratio of 0.32%. Its holdings have an average duration of 6.5 years and an average yield of 4.4%. 

EVSM aims to provide investors with tax-exempt current income by predominantly investing in municipal securities with a short-term focus. The fund has a net expense ratio of 0.19%. The average duration of its holdings is 1.75 years, with an average yield of 4.7%.  

Both funds were originally highly ranked mutual funds, with EVTR's predecessor, MSIFT Core Plus Fixed Income Portfolio, achieving a ten-year track record in the top decile, and EVSM's precursor, the MSIFT Short Duration Municipal Income Portfolio, ranking in the top third of its category over five years.

With these additions, Morgan Stanley now offers 14 ETFs in the U.S. and has more than $1 billion in total assets, despite introducing its first ETF early last year. Like many other asset managers, Morgan Stanley is looking to capitalize on increased demand for ETFs and active fixed-income strategies. 

Finsum: Morgan Stanley is joining many of its peers in converting mutual funds into active ETFs with the launch of the Eaton Vance Total Return Bond ETF and the Eaton Vance Short Duration Municipal Income ETF.

2024 has proven to be a much more challenging year for financial markets than 2023. Entering the year, the consensus was that the economy would continue to weaken, inflation would keep trending lower, and the Fed would be proactive and aggressive in cutting rates. 

Clearly, this has not happened. Amid this new paradigm, allocators are understandably looking to make appropriate adjustments to portfolios. Here’s why they should consider increasing exposure to active strategies.  

With fixed income, active investing can allow for precise exposure to a specific theme. For instance, those who don’t believe that inflation will keep trending lower may want to have higher exposure to short-duration debt. Another benefit is that active managers are able to quickly change strategies depending on how events develop, which makes them particularly useful in the current environment. This means that holdings can be optimized for the current environment of ‘higher for longer, but then managers can quickly pivot once the Fed actually starts cutting rates.

Active strategies can also be useful in other asset classes, such as international equities, which currently appeal to many investors due to favorable valuations relative to US equities. With active management, there is more focus on bottom-up, fundamental-focused analysis, which can result in more alpha in less efficient markets. Further, it can also lead to more diversification and risk management than is typically found with passive investing.

Finsum: The first quarter of 2024 has had several unexpected developments. Here’s why allocators should consider active management to navigate this tricky environment. 

While the Federal Reserve has been successful in lowering inflation over the past 21 months, it still remains uncomfortably high. The consumer price index (CPI) peaked at 9.1% in June 2022 and reached 3.1% in its last reading which remains above the Fed’s 2% target.

Equally relevant, many of the disinflationary impulses which drove the rate of inflation lower have subsided, while there are indications of nascent inflationary pressures budding. For markets, the implication is that the status quo prevails with the Federal Reserve holding rates at 5.50% since July of last year.

While bonds enjoyed a decent rally as the Fed moved from hiking to holding steady, volatility remains elevated due to the current uncertainty about inflation and Fed policy. As a result, the bulk of gains in fixed income proved to be fleeting. According to John Hanock, these conditions are ideal for active fixed income as managers will be able to take advantage of inefficiencies and dislocations caused by the current environment.

The firm believes that active managers will be able to outperform by overweighting quality, intermediate-term bonds, and defensive sectors. It also likes mortgage-backed securities (MBS) due to attractive yields without sacrificing quality. In contrast, it wants to underweight cyclical sectors and high-yield bonds given its concerns about a weakening economy in the second-half of the year. 

Finsum: Volatility has risen for fixed income ever since the outlook for inflation and Fed policy have gotten murkier. Here’s why John Hancock believes active fixed income is the ideal way for investors to take advantage of attractive yields.