Active bond managers better placed to outperform

19 May 2017
| By Oksana Patron |
image
image
expand image

In an environment of rising yields, active bond managers are better positioned to outperform, enhance portfolio returns and protect their invested capital in ways that typically are not available for passive managers, IOOF said.

First of all, with falling interest rates investors tended to chase higher yields by investing in longer dated bonds, which may lead to portfolio over-exposure to interest rate duration risk.

This would give active managers the flexibility to shift their portfolios to shorter duration assets to minimise capital losses.

Secondly, when considering corporate bonds, active managers tended to have greater flexibility to position the sector exposure, which would cushion bonds from the impact of interest rate rises.

At the same time, compared to the benchmark which had an allocation of over 50 per cent in government bonds, passive managers had no choice but to accept higher duration risk, low risk premia, and overall lower yields which resulted in poor benchmark performance.

According to IOOF, active managers also had flexibility regarding the financial instruments they chose and which were the best suited to different interest rate environments. 

This would include more complex financial instruments and other options that were not available to passive managers such as interest rate derivatives, inflation linked bonds, credit options and investing in different international markets or adding currency investments to a portfolio.

IOOF’s portfolio manager, fixed income, Osvaldo Acosta, said: “2017 will be another challenging year for bond managers given that short and long-term bond yields have been re-priced higher as markets are expecting the Fed and Reserve Bank of Australia to move cash rates higher.

“Bonds will always play a key role in a diversified portfolio however, in times of rising interest rates, an active manager will be better placed to uncover better risk/returns.”

 

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 1 week ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 1 week ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 1 week ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

3 weeks 3 days ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks 1 day ago

Having divested its advice business in August, AMP is undergoing restructuring in at least four other departments amid a cost simplification program....

2 weeks 5 days ago