Swedroe: Active Falls Short With Bonds, Too

August 07, 2017

In a July 2017 Q&A with WealthManagement.com, Western Asset Management CIO Ken Leech asserts that passive investing is unlikely to play as large a role in fixed income as it does now in equities, because active managers outperform their benchmarks much more in the bond market than they do in the stock market.

While the trend toward passive/index investing has been just as strong in the bond market as it has in the stock market, with passive bond mutual funds and ETFs experiencing a net inflow of $185.8 billion during the 12 months through May, according to Morningstar data cited in the article, Leech claims we’ve “been fortunate that the record of active beating passive is strong in fixed income.”

He added: “The index is around the bottom quartile of the active community, in terms of performance. We’re hopeful that evidence is compelling, and that active management will continue to play a dominant role.”

When asked why active strategies have done better in the bond market than in the stock market, Leech responded: “Government and government-sponsored agency bonds make up more than half of indices. Most studies suggest that overweighting high-quality bonds with higher yields than Treasuries gives you a powerful advantage over time compared to indices.”

Let’s see if Leech’s claims hold up to scrutiny, or if they are—like most claims about the success of active management—nothing more than what journalist and author Jane Bryant Quinn called “investment porn.”

Checking In With SPIVA

While the poor performance of actively managed equity funds is well-known, the performance of actively managed bond funds tends to receive less attention. To check Leech’s assertions, we will look to the S&P Dow Jones Indices year-end 2016 SPIVA U.S. Scorecard, which has 15 years of performance data on actively managed bond funds.

Following is a summary of the report’s findings:

 

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