Active bond fund performance trumps passive funds, Pimco data show

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Pimco, the (active) bond manager, took a swipe at the trend towards passive management on Monday with a new report showing active fixed income funds tend to outperform over medium time horizons.

The manager behind two of the biggest three US active bond funds issued research showing that active bond mutual and exchange traded funds in “most categories” have posted better performance than the median passive fund over the past one, three, five, seven and 10 years.

Pimco’s calculations show that 63 per cent of active bond funds provided investors with returns that beat the median passive fund over the five-year horizon.

One reason why bond funds might generate better returns has to do with the nature of bond indices. Because of its size, investors tend to be have an exposure of about a third to Treasuries when they invest in passive products, while active managers have more latitude, according to Morningstar research.

The California-based group drew a distinction with equities funds that have suffered through a string of under-performance. Indeed, only 43 per cent of active equities funds beat their benchmark over the past five years, according to Pimco’s data.

Notably, the performance of equities managers has perked up recently, as the link between individual stocks, sometimes called ‘pairwise correlation’ has begun to break down. Fifty-five per cent of large cap equities managers beat their benchmarks in March, compared with 35 per cent in February, according to Bank of America Merrill Lynch research.

“With pair-wise stock correlations at their lowest levels since 2000, the environment for stock-picking remains favorable for fund managers,”the BofA analysts said.

The stakes are high for Pimco. Passive funds have garnered large inflows at the expense of active managers in recent years, with investors preferring the low fees and high liquidity offered by the vehicles that track benchmarks.

Indeed, Vanguard’s passive Total Stock Market Index Fund overtook Pimco’s once leading Total Return Fund in assets several years ago. Meanwhile, active funds overall faced outflows of some $340bn last year, while passive funds received inflows of $505bn, according to Morningstar.

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