Active Management Finds Favor in Fixed Income

A dearth of attractive fixed-income indexes has institutional investors turning to active bond managers even as they go passive in equities.


Investors might still be pulling money from stock pickers, but at least one form of active management is seeing a resurgence.

New data from eVestment show that institutional investors allocated a net $55.3 billion to active fixed-income strategies in the first three months of 2017. It was the fourth straight quarter of positive flows to fixed income, with passive funds gaining $14.1 billion.

Money has shifted into the asset class as investors continue to pull billions from traditional equities managers, according to eVestment. While equities investors are increasingly shifting to passive strategies, fixed-income markets are viewed as less inefficient, making active management more attractive, according to Tim Bruce, NEPC’s director of traditional research.

“You do not have very good passive options available in fixed income,” said Bryon Willy, the lead fixed income researcher at Mercer. “They tend to skew the portfolio toward higher duration and lower yield. It becomes an easier methodology to beat.”

Some active managers are outperforming benchmarks by 50 basis points, net of fees, said Taylor Furlong, a fixed-income research analyst at NEPC.

The popularity of active mandates in fixed income can be attributed in part to rising duration and floating bank rates, according to Bruce, who noted his firm has seen a high volume of fixed-income manager searches this year as investors adapt to the changing market.

Corporate pensions are also pouring more money into credit and bonds as part of their liability-driven investing strategies, according to Willy. “As funded status improves, you’re going to see increased allocations to longer duration fixed income and decreased allocations to longer risk assets like equities,” he said.

Redemptions from active equities managers totaled $120.4 billion last quarter – a figure only slightly offset by a net allocation of $43.1 billion into passive strategies.

Meanwhile, the majority of fixed income strategies were up this quarter, led by global credit and global aggregate funds. Fixed income is a more attractive sector for active bets than, say, large-cap equities, where there’s “not such an obvious way to beat the S&P 500,” Willy said.