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.