The extreme market volatility in recent weeks has given new life to the active-passive management debate.
Markets + Macro
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The extreme market volatility in recent weeks has given new life to the active-passive management debate. While thereareadvantagesand disadvantages to each approach, in reality, neither is a panacea. Passive strategies may provide low-cost and tax-efficient management at the expense of outperforming the market. Active strategies may be more nimble, but challenged to identify the “right” opportunities. The discussion over each method’smerits becomesincreasingly complex when bonds are involved. In this piece, we discuss the pros and cons of active and passive management, and explore the nuances of each inthe fixed income world. Active Investing:An active fixed income investment strategy involves positioning the portfolio to capitalize on market conditions. Goal is to produce results that are better than that of the index. Passive Investing:A passive fixed income investment strategy involves mimicking the index and limiting trading activity. Goal is to produce results that are similar to that of the index. While passive investing has been very popular in the equity space, adoption has been slower in fixed income. We delve into why this may be next. Fixed income managers can introduce a number of risk factors to generate alpha. Active approaches may exploit any one of these strategies individually or in combination. Typically, as more risk exposures are introduced, the more the strategy performance might deviate from the index. Some of the most common approaches are explained. At IR+M, we believe active security selection can generate positive excess returns over the long-term.Whilethe lower fees associated with passive management can be appealing, investors sacrifice the tailored approach and available customization that active managers utilize to help clients meet their investment objectives. We believe that our relative value-oriented approach, dedicated team of experienced investment professionals, and proactive client service will continue to enable us to add value for ourclients.Definitions
Pros and Cons
Passive Investing Adoption in Equity Markets
Passive Fixed Income Management Considerations
Index Considerations
Security Selection Opportunities
Trading Inefficiencies
Approaches to Active Fixed Income Investing
Asset/Liability Management
Security Selection
Duration Management
Key Rate Management
Leverage
Source: Bloomberg as of 4/9/20; JPMorgan as of 12/27/2019. The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations for, or projected returns of any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research & Management. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
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