Displaying items by tag: active management

Friday, 23 February 2024 03:17

Benefits of Active Fixed Income ETFs

A major development in 2023 was the boom in active fixed income ETFs as measured by inflows and launches of new ETFs. Some reasons for interest in the category include opportunities for outperformance, lower volatility, and diversification. Ford O’Neil, fixed income portfolio manager at Fidelity Investments, sees structural reasons for the asset class’s recent success and believes it will continue.

 

According to O’Neil, there is more potential for outperformance in active fixed income vs equities, because indices only cover about half of the total bond market. In contrast, equity indices encompass a much larger share of the entire stock market. This means that the market will be less efficient, resulting in more undervalued securities. 

 

Active managers are also able to better navigate the current landscape, where there is considerable uncertainty about the economy and monetary policy given more latitude when it comes to security selection. He notes that active fixed income ETFs have delivered strong outperformance vs passive fixed income ETFs over the last 8 years. 

 

He stresses that identifying these opportunities is dependent on proper fundamental research and quantitative analysis followed by effective implementation. O’Neil is the co-manager of several active fixed income ETFs including the Fidelity Total Bond ETF (FBND) or the Fidelity High Yield Factor ETF (FDHY).

 

Published in Bonds: Total Market
Wednesday, 21 February 2024 13:43

Burton Malkiel Advocates for Direct Indexing

Burton Malkiel is one of the pioneers of passive investing with his classic, “A Random Walk Down Wall Street”, introducing the concept to millions of people. In his current role as CIO of Wealthfront, he has spoken about the power of direct indexing to enhance after-tax returns. In a recent blog post, he remarked that tax-loss harvesting is “the only reliable way for investors to outperform the market.” 

With direct indexing, portfolios are regularly scanned for tax-loss harvesting opportunities. This enables investors to capture the advantages of passive investing while still availing themselves of the tax loss benefits of a more active approach. 

Malkiel notes that passive strategies outperform active 90% of the time, and active returns are even worse after taking taxes into consideration. He sees direct indexing working well, especially for investors who are periodically putting money to work in their accounts and during periods of heightened volatility. 

In terms of other tax considerations, Malkiel believes that Roth IRAs are the best investment vehicles for the majority of investors. He recommends dollar-cost averaging when investors are in the ‘accumulation’ phase but not necessarily for those drawing down funds. And he reaffirms that keeping costs low is one of the keys to long-term investing success. 


 

Finsum: Burton Malkiel, the author of “Random Walk Down Wall Street” is an advocate for direct indexing given its power to boost after-tax returns.

Published in Wealth Management
Sunday, 18 February 2024 05:03

Vanguard’s Outlook for Active Fixed Income

Fixed income investors have had to deal with considerable volatility over the past couple of years. The asset class has provided investors with generous yields between but has not lived up to its potential in terms of moderating portfolio volatility and serving as a counterweight to equities. 

 

In the near term, this volatility is likely to persist especially given uncertainty about the economy and interest rates. Due to these circumstances, fixed income investors should consider actively managed ETFs which are better equipped to navigate these conditions. Active managers are able to optimize holdings and take advantage of opportunities that are unavailable to passive managers. 

 

Not surprisingly, active bond funds have outperformed since 2022 when interest rate volatility started spiking. Yet, many advisors have been slow to embrace active fixed income ETFs. Some have stuck to actively managed mutual funds instead. According to Capital Group, 80% of assets in fixed income mutual funds are actively managed, while only 12% of assets in fixed income ETFs are actively managed. 

 

Actively managed ETFs offer advantages such as lower costs, more liquidity, and tax advantages. Capital Group attributes slow adoption to a lack of awareness of the benefits of active fixed income ETFs and limited supply among advisors. To this end, it’s investing in educating advisors about why they should consider actively managed fixed income ETFs over other options. 


Finsum: Active fixed income ETFs have many advantages over passive fixed income ETFs and actively managed fixed income mutual funds especially in the current environment. Yet, adoption has been slow for a few reasons.

 

Published in Bonds: Total Market

With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.

 

Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.

 

The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable. 

 

According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”


Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows. 

 

Published in Bonds: Total Market

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.  

 

Published in Bonds: Total Market
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