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Active Versus Passive Investing: Why Bonds Are Different

In equities, many active investment strategies have lost ground to passive strategies, but fixed income is different. In this video conversation with David Solomon, chairman and CEO of Goldman Sachs, PIMCO CEO Manny Roman discusses how several features of bond markets and the broader economy tend to favor active fixed income managers over their passive peers.
Learn more about how bonds are different and the active advantage in fixed income.

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Text on screen: An excerpt from Talks at GS on September 14, 2018

David Solomon, CEO Goldman Sachs: But still staying, for example using PIMCO as an example, still staying in the lane of you're a credit shop, you're a fixed income shop.

As opposed to having to offer solutions across all different ranges of products, [unintelligible] equities.

Emmanuel Roman, CEO PIMCO: So I think there's this tension. And I think people have different answers. So I think being best of breed at one thing —

David: There's no question, best of breed at one thing will always win, no matter what the model is that gets you to best of breed, that will always win. But there's no question that — there's no question in my mind that both can exist.

Emmanuel: I think there's two things in asset management. The first thing is, PIMCO has been doing fixed income for 46 years. And I think that really matters 'cause it's your DNA. And it's sort of what you know how to do. I think the other challenge is what does it mean to be good in equity, in a world where passive is winning.

David: So talk about — passive's definitely winning and there's no question it's a secular trend that's gonna continue. But can you see a world where the world looks differently and active management's doing better than it's been doing the last few years?

Emmanuel: So I think you need to make a big difference between active and fixed income, and active and equity. In fixed income, I think good managers have very consistently beat the benchmark on the 1, 3, 5 and 10 years. And we've put a position paper on this explaining that the reason why active fixed income works so well is because of central bank, of the biodiversity of the fixed income market, of derivative versus cash, of new issues, and so on, so forth. And our numbers very much show it.

In equity it's been difficult. And it's been difficult when other people offer no load ETF at zero management fee. Now one other thing I learned from Chicago is that even if you have a big part in passive, the active management needs to add up to zero in terms of winners and losers. So it's entirely possible that as passive takes more and more in equity, you actually see really, really good equity manager who delivers a lot of alpha, and then some big losers.

David: And some big losers [unintelligible] —

Emmanuel: Because it needs to add up.

David: It needs to add up to zero.

Emmanuel: And it's too early to tell, but I'm sure you're gonna see some. For us – our clients pay us because we do active management. So, they want us to take risk.

David: They want you to take risks.

Emmanuel: Yeah, exactly. And so we need to step to the plate. And we're entrusted with money from, as I said, millions of clients. And that's what we need to do.

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