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Why active for bonds?

Passive may make sense for equities - but bonds are different

The median active bond manager has outperformed its passive peer by about 50 bps over the last 10 years – unlike its equity counterpart. These gains may compound over time and can represent meaningful total return potential.

10-year returns of median U.S. active and passive managers
fig.1Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016. Source: Morningstar
Based on Morningstar U.S. Intermediate-Term Bond Category for fixed income and Morningstar U.S. Large Cap Blend Category for equities. Institutional share class.
1Core Fixed Income: Bloomberg Barclays U.S. Aggregate Index; Core Equity: S&P 500 Index
fig.1Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016. Source: Morningstar
Based on Morningstar U.S. Intermediate-Term Bond Category for fixed income and Morningstar U.S. Large Cap Blend Category for equities. Institutional share class.
1Core Fixed Income: Bloomberg Barclays U.S. Aggregate Index; Core Equity: S&P 500 Index

Bonds Are Different

Structural elements create opportunities for active managers

The differences between stocks and bonds, including how they trade, create bond-market specific headwinds for passive strategies – giving active managers more of an edge in fixed income than in equities.

Over-the-counter trading: differences in how bonds and equities trade

Stocks trade roughly 45 times more than the most liquid investment grade corporate bonds in a day - and the size of those trades are considerably smaller.

Typical Trades Per Day

Average Trade Size ($)

  • Most Liquid Investment Grade Corp
  • Most Liquid High Yield Corp
  • NYSE/NASDAQ Stocks
fig.2As of 31 December 2016
Source: McKinsey, NASDAQ, QMX, NYSE Euronext, FINRA TRACE

Why go active now?

Lower expected returns makes alpha more important than ever

Forward-looking index returns, over a five-year horizon, have historically been closely correlated with the index's yield at the start of each measurement period. By going passive today, your bond portfolio is likely to return today's yield (less than 3%) more or less, minus fees, annually.

Correlation between yield and five-year forward looking returns
 
 
fig.3Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.
fig.3Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.
fig.3Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.

Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

A Word About Risk: Management risk is the risk that the investment techniques and risk analyses applied by the investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the investment manager in connection with managing the strategy. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. It is not possible to invest directly in an unmanaged index. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.