Be Active, Not Passive, In Fixed Income

Be Active, Not Passive, In Fixed Income

As Legg Mason's Tom Hoops recently noted in the Financial Times, opportunities abound in fixed income for active investors despite concerns about rates and volatility.


As the US Federal Reserve embarks on unwinding its massive balance sheet, investors may be needlessly anxious. Even with concerns about volatility and today’s low yields and tight bond spreads, opportunity abounds in fixed income.

 

Financial Times, Oct 4, 2017:

Worried about the "Great Unwind" and the potential impact on your income portfolio?

 

It is unlikely to be found through passive benchmark-tracking investments, however. One important way to generate greater alpha opportunities in fixed income is through active management. Consider these structural advantages that can give active managers an edge.

  • Fixed income benchmarks may be poorly constructed. Bond indices typically assign larger weights to countries and companies that issue more debt. Passive products thus increase exposure to credits of potentially deteriorating quality.
  • Fixed income benchmarks have high concentrations of government and government supported debt. Yields on many of these bonds are unattractive, at or near historical lows.
  • Fixed income benchmarks exclude a large portion of the investable universe. This can limit returns and diversification.
  • Fixed income benchmarks have frequent turnover. Trading costs, potentially substantial, can disadvantage passive investors.
  • Active investors have a timing advantage. Active managers can trade in the primary market at any time to obtain new issues at yield premiums. These are typically not available to many passive managers.

For more detail, read the story as it appeared in the Financial Times.

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IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Diversification does not guarantee a profit or protect against loss.

Outperformance does not imply positive results.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Active management does not ensure gains or protect against market declines.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.