Pimco's research has found that the majority of active bond funds outperform their lower-fee passive counterparts, which is contradictory to equity strategies, Jamil Baz, Pimco's global head of client analytics, has said.
Active strategies incur higher fees, so the majority should underperform their lower-fee passive counterparts. Recent media coverage on the rotation from active to passive funds, focusing chiefly on equities, may only reinforce this perception, according to Baz.
However, Pimco's research suggests the bond market is doing the opposite.
'The majority of active bond funds and ETFs beat their median passive peers after fees over the past one, three, five, seven and 10 years, with 63% outperforming over the past five years,' Baz said.
'In contrast, the majority of active equity strategies failed to beat their median passive counterparts during the period. Only 43% outperformed over the past 5 years; in every other period, the percentage is lower still.'
Bonds are different
Baz believes the reason why active bond strategies have been more successful than active equity approaches for this period lies in the bond market's unique structure.
'Non-economic investors make up roughly 47% of the $102 trillion global bond market. Central banks, for instance, may buy bonds to weaken their currency or boost inflation and asset prices. Commercial banks and insurance companies may care more about book yield or credit ratings than total return.'
As a result, non-economic investors leave alpha potential on the table for active bond managers, said the managing director.
Other reasons include that the composition of bond indexes changes frequently; bonds, unlike stocks, mature after a number of years, leading to more turnover in the bond market.
Additionally, Baz said structural tilts can be an important source of durable added value.
'Active managers, for instance, can target factors such as duration and exposures to high yield credit, mortgages, high yielding currencies and other sources of potential alpha.'