Displaying items by tag: active management

There’s been an ongoing debate about passive strategies vs active strategies in equities and fixed income. While passive strategies have generally proven to outperform in equities, the same is not true for fixed income. In fixed income, active managers have outperformed. Over the last decade, the average active intermediate-term bond fund has outperformed its benchmark, 60% of the time. 

 

According to Guggenheim, this can be partially attributed to risk mitigation strategies which are not available in passive funds. Another factor is that the equity markets are much more efficiently priced than fixed income since there is more price discovery, publicly reported financials, and a smaller universe of securities. Equities are also dominated by market-cap, weighted indices.

 

Relative to equities, there is much less information about fixed income securities, less liquidity and price discovery, a larger market at $55 trillion vs $44 trillion, and many more securities especially when accounting for different durations and credit ratings. Additionally, less than half of fixed income securities are in the Bloomberg US Aggregate Bond Index (Agg) benchmark. All of these factors mean that there are more opportunities to generate alpha by astute active managers. 


Finsum: There is an ongoing debate on whether active or passive is better for fixed income. Here’s why Guggenheim believes that active will outperform against passive. 

 

Published in Wealth Management
Tuesday, 09 January 2024 06:51

Active ETFs Gaining Traction

Active ETFs represent a fraction of the overall market of investable assets, but the future looks very promising given current growth rates. This is evident through the bevy of new active ETF launches which will continue in 2024. Last year, 75% of ETF launches were active. Additionally, according to Cerulli, 95% of ETF issuers have existing plans or are planning to launch active ETFs in the coming year. 

 

Some of these active ETFs will be conversions of active mutual funds, while others will follow a dual-class structure. In terms of why active ETFs are gaining traction, the biggest factor is the tax benefits of the ETF structure. In contrast, many investors in active mutual funds may find themselves with a tax bill if the fund takes profits on winning positions.

 

Additionally, the fee structure of ETFs is much simpler while it also leads to more transparency for investors. This appeals to many investors who are then able to hedge risk more effectively.  Currently, most of the focus on issuers is for transparent, active ETFs with 59% of launches falling in this category. One caveat is that active ETFs have failed to penetrate the institutional market as 80% of assets currently come from retail investors.


Finsum: Active ETFs had a strong year in 2023 and even more launches are planned for 2024. Here are the major factors driving the category’s growth. 

 

Published in Wealth Management
Thursday, 28 December 2023 03:10

Active Fixed Income Outlook for 2024

Entering 2024, active fixed income investors are grappling with a unique mix of risks and opportunities given recent developments in inflation, yields, and rates. Insight Investment collected thoughts from BNY Mellon’s fixed income portfolio managers to get their thoughts on the coming year. 

 

Adam Whiteley, the portfolio manager of the BNY Mellon Global Credit Fund, sees a continuation of 2023 trends in credit markets in 2024. He believes developed economies will avoid a recession. However, the major focus is on determining where markets are in the credit cycle. This will have implications for identifying risks and the best sectors within the fixed income universe.

 

The portfolio managers of the BNY Mellon Global Short-Dated High Yield Bond Fund have a positive bias for high-yield and short-duration debt. Yet, they believe that investors will have to take credit analysis and cash flow modeling more seriously, given they expect a slight increase in the default rate. Overall, they still see the high-yield debt market as being stable and strong despite these risks due to better credit quality and strong balance sheets.

 

In terms of emerging market (EM) debt, the firm has a cautious outlook in the near-term despite more upside for EMs. The biggest variable is likely to be developed market and economic performance. EM corporates tend to have strong balance sheets so are well positioned for any slowdown. 


Finsum: BNY’s active fixed income managers shared their thoughts and outlook for 2024. Overall, they see some risks in the coming year, but the overall market remains in a good place. 

 

Published in Wealth Management
Sunday, 10 December 2023 08:50

Reasons Behind Active Outperformance

There is increasing signs of a turnaround in the bond market given compelling valuations, attractive yields, and indications that the Fed is done hiking rates. While many investors will instinctively look to move into passive fixed income funds, active fixed income offers some specific advantages. 

 

Over the last decade, active fixed income managers have outperformed their benchmark more than 75% of the time even after taking all fees into account. According to Joseph Graham, the Senior Managing Director, and Head of the Investment Strategist Group at Lord Abbett, this is due to several unique factors which make the fixed income market inefficient.

 

The primary reason is that institutional fixed income investors such as banks, insurance companies, and central banks make decisions based on non-economic factors such as regulations or market stability. This can distort pricing and create opportunities for savvy managers. 

 

Another inefficiency is that benchmarks are weighted by the amount of debt outstanding. This means that borrowers with considerable amounts of debt are overrepresented. Similarly, indices often have constraints around size and maturity, creating opportunities for alpha around these under-owned securities. Asset managers with teams that specialize in a particular niche are particularly well-suited to discovering such pricing discrepancies.


Finsum: Active fixed income has outperformed passive fixed income funds. Some of the reasons that the fixed income market is inefficient are because many market participants have non-economic incentives and indices are skewed to overrepresent borrowers with considerable amounts of debt. 

 

Published in Wealth Management
Thursday, 30 March 2023 10:17

Active management in its groove

Last year, active was the operative word, as passive management stared into the taillights of fixed income active managers, according to bsdinvesting.com.

In the midst of the Fed’s policy change and a rejuiced market, active management improved markedly in the second half of the year. Over the last two quarters, an average of 60% of active managers outdid passive management.

Meantime, in January, while Vanguard noted that additional volatility appeared to be in the cards this year, for active management, it foresaw a bigger opportunity for it to strut its stuff.

The decisions of active sector and security selection should carry a bigger stick in a market holding its own against macroeconomic forces or taking a back seat to central banks.

Across most segments, appealing yields are attainable, including some of the best value in higher quality bonds. Even in the face of watered down economic conditions, it should hold its own.

 

Published in Eq: Total Market
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