Displaying items by tag: active management

Entering 2024, active fixed income investors are grappling with a unique mix of risks and opportunities given recent developments in inflation, yields, and rates. Insight Investment collected thoughts from BNY Mellon’s fixed income portfolio managers to get their thoughts on the coming year. 

Adam Whiteley, the portfolio manager of the BNY Mellon Global Credit Fund, sees a continuation of 2023 trends in credit markets in 2024. He believes developed economies will avoid a recession. However, the major focus is on determining where markets are in the credit cycle. This will have implications for identifying risks and the best sectors within the fixed income universe.

The portfolio managers of the BNY Mellon Global Short-Dated High Yield Bond Fund have a positive bias for high-yield and short-duration debt. Yet, they believe that investors will have to take credit analysis and cash flow modeling more seriously, given they expect a slight increase in the default rate. Overall, they still see the high-yield debt market as being stable and strong despite these risks due to better credit quality and strong balance sheets.

In terms of emerging market (EM) debt, the firm has a cautious outlook in the near-term despite more upside for EMs. The biggest variable is likely to be developed market and economic performance. EM corporates tend to have strong balance sheets so are well positioned for any slowdown. 

Finsum: BNY’s active fixed income managers shared their thoughts and outlook for 2024. Overall, they see some risks in the coming year, but the overall market remains in a good place. 

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.

Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

Last year, active was the operative word, as passive management stared into the taillights of fixed income active managers, according to bsdinvesting.com.

In the midst of the Fed’s policy change and a rejuiced market, active management improved markedly in the second half of the year. Over the last two quarters, an average of 60% of active managers outdid passive management.

Meantime, in January, while Vanguard noted that additional volatility appeared to be in the cards this year, for active management, it foresaw a bigger opportunity for it to strut its stuff.

The decisions of active sector and security selection should carry a bigger stick in a market holding its own against macroeconomic forces or taking a back seat to central banks.

Across most segments, appealing yields are attainable, including some of the best value in higher quality bonds. Even in the face of watered down economic conditions, it should hold its own.

In a recent article for John Hancock’s Recent Viewpoints, Steve L. Deroian, Head of Asset Allocation Models and ETF Strategy offered his take on why active fixed-income ETFs provide value. Deroian noted that while active ETFs have slowly gained traction since they first appeared in 2008, there have been recent signs that investors are becoming more interested in gaining exposure to active management in ETFs. In fact, since 2008, the number of active fixed-income ETFs has grown exponentially. In John Hancock’s opinion, one factor behind the rapid growth is the changing composition of the U.S. bond market over the past ten years. Passive strategies have become much more concentrated in government debt. At the end of December, Treasuries accounted for over 40% of the Bloomberg U.S. Aggregate Bond Index, while the duration of the index has risen and is now at more than six years, indicating passive fixed-income ETFs carry a fair amount of interest-rate risk. Active fixed-income ETFs, on the other hand, aren’t required to track the benchmark. They can instead shift duration based on the manager’s outlook for interest rates. The management team can also manage sector allocation based on its ability to find relative value opportunities. Since the range of returns between fixed-income sectors can often be large, this creates an opportunity for active managers to add value over time.

Finsum:The number of active fixed-income ETFs has grown exponentially and John Hancock’s Steve L. Deroian believes one reason for that is the concentration of government debt in passive bond ETFs that carries a fair amount of interest-rate risk.

According to Investment Metrics' most recent fee analyzer report, active management fees dropped last year after underwhelming returns. U.S. fixed-income managers saw the largest reduction in fees, with a 7% average annual cut. In fact, post-negotiated fees for active managers decreased in most categories last year. The report was based on the analyses of almost 490 distinct accounts and co-mingled funds. According to Investment Metrics, the fee reduction trend appears to correspond to poor performance of active managers as most categories fell short of beating their standards. Scott Treacy, a research consultant at Investment Metrics, wrote the following in the report, “Normally, the fixed-income asset class protects investors when equity markets crater, but that did not happen in 2022.” He added, “Active U.S. fixed income disappointed in particular. Unfortunately, at a median level, active managers were not able to perform well in this environment.” While active managers had a chance to demonstrate that their expertise could shield portfolios during the downturn, the underwhelming results may put greater pressure on active strategies. Treacy concluded that “Those active managers that were not able to perform in the down market of 2022 will most likely see their assets go to passive strategies, or to other active managers that performed well in this difficult environment.”

Finsum:Active management fees dropped last year after managers produced underwhelming returns, with U.S. fixed-income managers seeing the largest reduction in fees.