In the realm of fixed income investing, active management appears to hold a distinct advantage over passive strategies. According to a recent analysis, structural inefficiencies and a fragmented market landscape provide ample opportunities for skilled managers to outperform. Unlike equities, where debates about active versus passive management persist, the case for active management in fixed income is clearer due to these unique market conditions.
Active fixed income managers can leverage a broader range of opportunities, including sectors not represented by typical indices like the US Aggregate index. These managers can dynamically adjust portfolios based on changing market conditions and exploit dislocations more precisely than their passive counterparts. Over the past decade, active managers have outperformed passive funds in 84 rolling three-year periods, achieving an 87% success rate.
However, while active management has generally delivered better returns than passive strategies, maintaining consistency at the top remains challenging. A study tracking 102 US intermediate Core Plus funds found that only seven remained in the top quartile from 2019 to 2024 when considering risk-adjusted returns.
Periods of volatility are becoming more frequent and intense, further highlighting the importance of strong active management. "When volatility spikes," experts say, "the ability to identify dislocations, manage downside risk and dynamically reposition portfolios is critical."
A practical framework suggests that sector allocation must consider downside risks and correlations while exploring a wide opportunity set with well-sized teams is crucial for success. The size of funds also plays a role; being flexible and nimble can be key to repeatable success but requires deep resources.
The insights shared emphasize that sustained alpha requires more than just good trades—it demands a well-resourced team with macro insights and bottom-up security selection expertise.
"The views expressed in this post are those of the authors," noted Eaton Vance. These views should not be relied upon as investment advice as they may change based on market or other conditions.
In conclusion, as volatility rises within fixed income markets, the necessity for robust active management becomes evident. While these strategies have shown superior performance compared to passive ones historically, their execution requires significant resources and expertise.