Displaying items by tag: active fixed income

Separately managed accounts (SMAs) are evolving, with more firms integrating active management into customized portfolios. Unlike traditional SMAs that use passive indexing or third-party overlays, some new strategies incorporate direct active management for greater efficiency.

Actively managed large-cap equity SMAs, for instance, aim to provide market exposure while outperforming benchmarks through selective stock holdings. Transparency is also improving, with firms introducing after-tax reporting to help investors understand the impact of tax-efficient strategies.

Fixed-income SMAs are seeing similar advancements, with more customization options, such as state-specific municipal bond strategies.

Finsum: As the demand for personalized investing grows, SMAs are becoming a key tool for advisors seeking both performance and tax efficiency.

Actively managed U.S. bond funds saw a resurgence in 2024, drawing in substantial investment after two years of outflows, with industry leaders like Pacific Investment Management Co. leading the charge. Morningstar Direct data revealed that six of the ten bond mutual funds with the highest net inflows were actively managed, pulling in a combined $74 billion.

In total, actively managed bond funds attracted $261 billion over the year, the highest level since 2021, despite a bond market selloff triggered by the Federal Reserve’s first rate cut in four years. Core and income-focused bond strategies were the biggest winners, appealing to investors seeking stability in an uncertain interest-rate landscape. 

With Treasury yields hovering near 5% and credit spreads historically tight, investors are weighing the risks and rewards of bonds versus other asset classes. While the Pimco Income Fund remained the largest actively managed bond fund with $26.8 billion in inflows, the Vanguard Total Bond Market Index Fund led all funds with $33.4 billion. 

Finsum: Uncertainty around fiscal policy and potential inflationary pressures under the new administration could shape how bond markets evolve in 2025.

When considering fixed income ETFs, active strategies offer notable advantages over passive ones. Unlike equity indexes, replicating a bond index like the U.S. Agg is "impossible" due to smaller bond quantities, infrequent trades, and varying maturities and credit ratings.

 Active management allows flexibility to adapt to shifting bond markets and interest rate environments. The T. Rowe Price QM U.S. Bond ETF (TAGG), for example, charges eight basis points and seeks to outperform the U.S. Agg through a diverse range of investment-grade U.S. bonds.

 As fixed income ETFs grow in popularity, active strategies present a valuable alternative. This trend reflects a broader move towards active management within the ETF space.

Finsum: When thinking about the advantages of active bonds its important to consider this index replicability that you can’t get in fixed income. 

In the current macroeconomic environment, fixed income investors have numerous options for attaining yield but getting active management is a different story, making the Eaton Vance Total Return Bond ETF (EVTR) particularly noteworthy. This ETF offers core exposure in an actively managed fund at a low cost, which is beneficial as interest rates are expected to stay high before eventually declining. 

Active management of the EVTR can provide the necessary flexibility to navigate the uncertainties of the bond market, especially with the volatility that has persisted into 2024. The fund's benchmark, the Bloomberg U.S. Aggregate Index, ensures a diversified mix of over 500 holdings, including safe haven Treasuries and higher-yielding bonds. 

Investors benefit from an attractive expense ratio of 0.39% and a 30-day SEC yield of 5.17%. The EVTR provides a comprehensive solution for core bond exposure or as a complement to existing bond portfolios, leveraging the expertise of Eaton Vance’s fixed income team.

Finsum: Typically, cost is the main concern with active management, but a cheap active exposure could be the goldilocks solution. 

Financial markets are increasingly complicated these days given the uncertainty regarding inflation, monetary policy, and the economy’s trajectory. For investors, the challenge is heightened as both equities and bonds have become increasingly correlated. In a piece for Pension & Investments, MFS Investment Management shared why active fixed income makes sense in this environment and detailed the firm’s approach.

According to Pilar Gomez-Bravo, the co-CIO of fixed income at MFS, “With this macro backdrop and the uncertainty around central bank policy, alpha generation from active management will be a more important factor for most fixed-income investors going forward.” 

With increased volatility, MFS recommends that fixed income investors ensure that they are sufficiently diversified to minimize risk by properly balancing duration and default risks. Its active management strategy is based on collaboration between its investment teams, consistency in its investment process, a focus on generating alpha throughout the cycle, and conviction in taking action when there are dislocations in the market.

Some other elements of the firm’s active fixed income approach is to manage and structure the portfolio to express a broad view and diversity of thought. Each portfolio is stress tested to ensure resilience, while the fixed income team stays connected to the equity team to get a holistic view of the markets and economy.

Finsum: Active fixed income is seeing a substantial increase in inflows given relatively high yields, while there is considerable uncertainty about the economy and monetary policy.