Top active bond fund manager on strategy and interest rate outlook
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Morningstar reports that stock pickers are not likely to outperform indexes. However, active bond manager managers seem to be doing better than most, with a majority of them beating the indexes.
According to a semiannual Morningstar Report, 84% of active-bond fund managers had outperformed active equity managers over the past year that ended June 30, 2021. Only 47% managed active equity funds.
Though the gap narrows over longer time periods — just 27% of active bond funds beat their benchmarks in the last 10 years versus 25% of active equity funds — active management does offer some advantages to fixed-income investors, Pimco’s Jerome Schneider told CNBC’s “ETF Edge”This week.
Schneider is the head of Pimco’s short-term portfolio management. He oversees the second largest actively managed bond ETF in the world, The Schneider. PIMCO Enhanced Short Maturity Active Exchange-Traded Fund(MINT).
Schneider noted that the flexibility to differ from benchmarks indexes was “an incredibly significant differentiator” in active bond fund management.
Many active bond managers were able to take on more credit risk in 2021 and 2020, for example. Federal ReserveHe said that he was trying to ease the pressure on fixed-income markets.
The Fed is now signaling that it will start to taper its bond purchasesHe warned that managers should be cautious when they reduce monetary support.
He noted that, in 2008, in times of financial crisis and high interest rates, just 8% (or a small fraction) of Bloomberg Barclays’ Aggregate Bond Index had been invested in BBB rating bonds. This is the lowest ranking bond in the investment grade category. Schneider stated that they now account for over 15% of the index.
His statement was simple: “By owning the index, it’s simply taking on a lot of credit risk which might not necessarily be the most appropriate positioning in this environment… With growth moderated and a range central bank policy creating a propensity to a little more volatility in future,” he stated.
Schneider explained that active Nimble managers may be able to help lower this risk while moderate it, despite the Fed’s uncertain interest rate timeline.
He said that although the “era low rates and low volatility” has passed, near-term swings may cause the Fed to be patient as it awaits supply chain disruptions or other inflationary pressures in the markets.
Schneider stated that “our forecast for rate increases is likely still 2023” and could be pushed into the late 2022. We believe that inflation will begin to slow down, which will allow the Fed to be more flexible in their response to current conditions.
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