Active bond managers better placed to outperform

bonds yields funds

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

This verdict highlights something deeply wrong and rotten at the heart of the FSCP. We are witnessing a heavy-handed, op...

2 days 7 hours ago

Interesting. Would be good to know the details of the StrategyOne deal....

6 days 13 hours ago

It’s astonishing to see the FAAA now pushing for more advisers by courting "career changers" and international recruits,...

3 weeks 4 days ago

Insignia Financial has made four appointments, including three who have joined from TAL, to lead strategy and innovation in its retirement solutions for the MLC brand....

2 weeks 6 days ago

A former Brisbane financial adviser has been charged with 26 counts of dishonest conduct regarding a failure to disclose he would receive substantial commission payments ...

5 days 11 hours ago

Pinnacle Investment Management has announced it will acquire strategic interests in two international fund managers for $142 million....

4 days 14 hours ago