Actively managed bond funds have outperformed passively managed bond funds over the past year, and could do so again if the Federal Reserve lowers interest rates. In the 12 months ending in June, about two out of three active bond managers outperformed the average passive bond manager, according to a recent Morningstar analysis. In particular, the intermediate core fixed income category (funds that invest primarily in investment grade corporate bonds, government bonds, and securitized bonds) had a success rate of 72%. There were also some tailwinds in favor of active managers. For most of that period, the federal funds rate has been in the 5.25% to 5.5% range, and investors tend to favor exposure to short-duration bonds, which are less price sensitive to interest rate changes. brought benefits. People who are willing to take credit risks. “This has been the absolute sweet spot for fixed income over the past 12 months, and it’s reflected in the overall performance of active fixed income managers,” said Ryan Jackson, senior analyst for passive strategies at Morningstar. You’ll understand.” These active bond funds have a New challenges await. “Looking forward, this great yield that people have been enjoying is not going to go to zero, but it’s going to be an interesting time for fixed income investors,” Jackson said. Agile approach Passive bond funds tend to have a higher weighting of U.S. Treasuries than active bond funds, and managers are likely to take on some credit risk and exposure to bespoke bond holdings, Jackson said. said. “That market is fragmented, making it even more likely that mispricing will occur,” he added. “This presents a better opportunity to capitalize on that mispricing.” Another advantage for active fund managers is the opportunity to take advantage of market developments. Paul Olmsted, senior manager research analyst for fixed income at Morningstar, said passive funds have to buy specific securities to mimic the index they follow, which compresses the spreads on those assets. He said it was possible. “(Active) managers can take advantage of the dynamics of passive funds to avoid some of the securities that may be technically challenging and to avoid other parts of the market that may not be included in the index. “We can go in and offer a little bit better relative value,” he said. Roger Hallam, Vanguard’s global head of interest rates, said if interest rates fall, active managers can take positions accordingly. “If you’re passive and don’t have the ability to change your yield curve exposure, you’re not going to benefit from the Fed’s attempts to soften the economic landing,” he said. Hallam specifically highlighted that the core bond and core plus bond categories offer investors a combination of characteristics that perform well in difficult times and also offer yield. See below for a list of the best-performing actively managed bond funds for the 12 months ended June 30, as analyzed by Morningstar. Leader Capital Short-Term High Yield Bond Fund (LCCMX) returned 21.87% in that period. It benefits from an approximately 94% allocation to variable rate instruments, and approximately 98% of its holdings have a duration of less than one year. Both factors performed well in a high interest rate environment, propelling LCCMX to the top of Morningstar’s list of best performers over the same period. The fund has a 30-day SEC yield of over 10%, but it also has high costs, with annual fund operating expenses totaling 3.24%, according to LCCMX’s prospectus. Shop for quality and cost Morningstar found that even though actively managed mid-core bond funds outperformed passively managed funds, the most successful funds were those with the lowest expenses. “We expect active managers to earn a little more,” Olmstead said. “They’re trading more, and it’s more expensive to manage active portfolios, so that should be the case.” “Price is important, and you have to look at it from that perspective as well, because price affects (investor) returns.” Investors should also look at the asset classes that are giving a particular fund a high yield. You need to understand it well. The return prospects for bond funds may be attractive, but if they suffer from a recession, it’s all for naught. Even worse, if investors fail to offset the volatility they may see on the equity side of their portfolios. “Be aware of the risks, especially the low-grade credit risks,” Olmsted said.
