Displaying items by tag: fixed income,

2023 has been quite different compared to 2022 especially from a financial markets perspective. Due to raging inflation and a hawkish Fed, 2022 saw weakness in both stocks and bonds. In contrast, both asset classes have delivered positive returns in 2023 YTD despite significant and continued headwinds.

This is particularly the case for active fixed income. In an article for the Financial Times, Madison Darbyshire and Harriet Agnew highlight how large asset managers have been increasing allocations to the category as they look to lock in higher rates with the Fed in the final innings of its rate hikes. Analysts are noting demand from institutional and retail investors, across the active fixed income spectrum. 

In 2022, $332 billion moved out of the category, but 2023 has already seen inflows of $100 billion in the first third of the year. This trend is expected to only strengthen with active fixed income ETFs expected to continue taking a larger share of the fixed income and ETF universes. According to State Street CEO Yie-Hsin Hung, "It feels like the beginning stages of what happened in equities.”

Finsum: After a poor 2022, inflows into active fixed income are sharply higher as they look to lock in higher rates given the end of the Fed’s tightening and increasing odds of a recession.

Historical lows. This year, they’ve besieged the Bloomberg Global Aggerate and Bloomberg U.S. Treasury indexes, according to etftrends.com.

As they put high risk assets in the market, investors are second guessing the role of fixed income in their portfolios. That’s where active managed funds can provide a boost.

Fixed income might not exactly be in the driver’s seat now, but when it comes to the bond market, investors can’t simply look the other way. Why not? Well, it’s not just the world’s largest securities market – and by a considerable margin – it’s also rode the wave of significant growth. And that’s both in terms of size and the number of issuers.

“Navigating the bond market is even more challenging for advisors this year as bonds fall in value,” said Todd Rosenbluth, head of Research at VettaFi. “However, the ability to tap into the expertise of experienced managers along with the liquidity benefits of an ETF has been compelling.”

Meantime, face it: many investors aren’t accustomed to the volatility and price drops prompted by dramatically growing interest rates this year, according to advisorscapital.com.

The upside? Yields on fixed income securities have really made out better than they have in years.

It’s no secret that many active fund managers fail to beat their benchmarks over the long term, but investor trading activity in those funds is even worse. A Morningstar examination of investor returns in the largest active bond funds revealed self-destructive behavior by investors. According to Morningstar, investors in the 20 largest Intermediate Core Plus Bond funds, which have 10-year records, were so bad over the last ten years that they gave up more return than the Bloomberg US Aggregate index delivered. The average fund returned 2.11% annualized for the last ten years ending in August, while the Bloomberg US Aggregate index returned 1.35% return. Surprisingly, every single one of the 20 funds outperformed the index, but investors were not able to take advantage of this outperformance. Investors lost 75% of the average return the funds delivered, ending up with an 0.53% annualized return. Poor timing can account for the dismal returns for investors. Between 2021 and 2022, investors added $91 billion to the category looking for extra yield over the aggregate index. Unfortunately, this coincided with inflation which led to intermediate-term bond prices falling.

Finsum: Investors poured money into active fixed-income funds at the worst possible time, leading to massive underperformance compared to the funds.