BOND powerhouses including Pacific Investment Management, BlackRock and Capital Group are dangling the prospect of 5 per cent yields to convince investors it’s time to plow more assets into actively managed fixed-income funds. Clients are paying attention.
About US$90 billion flowed into active bond funds in the first quarter, the most for any three-month period since mid-2021. With yields now at their highest in almost two decades, fund managers see a window of opportunity for investors to lock in outsized returns before the Federal Reserve fulfils its promise to cut rates. It’s also a chance for active managers to rebuild their portfolios, which had been starved by years of near-zero interest rates.
The fresh inflows mark the start of “a longer multi-quarter and potentially multi-year trend out of cash”, said Ryan Murphy, head of fixed-income business development at Capital Group, the Los Angeles-based bond colossus. While many investors are still cautiously favouring cash, the rising payouts on debt securities should encourage more to shift their money into longer-dated bonds, according to Murphy. “Investors are getting the best compensation on fixed income in 20 years,” he said.
While the sums are substantial, the real prize for bond managers is getting investors to shift out of money market funds, which had been holding more than US$6 trillion. It’s dropping now – the latest data showed the largest weekly drop in short-term cash holdings since September 2008. So far this year, the figures show investors have continued to add to both active and passive bond funds as well as money market funds, with evidence that they’re trimming exposure to some equities and private assets.
Bond buying right now is a tricky calculus for individual investors, in part because the timing and number of rate cuts keep getting pushed back, with the latest delay signalled by Fed chair Jerome Powell in an Apr 16 discussion. It also takes no small effort to sort through distorted bond prices and credit quality to find real opportunities.
All of that favour active managers. “The big picture is that yields are attractive and you need to be an active manager in this environment”, to take advantage of divergences in the price of bonds from different countries and companies in bond indices, Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said in an interview last week.
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About-face
Collectively, US bond and exchange-traded funds attracted inflows of about US$159 billion in the first quarter, according to data compiled by EPFR. Active managers got the bulk of it, taking in approximately US$90 billion, while passive funds captured US$69 billion. That’s an about-face from last year, when active bond funds took in just US$19 billion and their passive peers collected US$279 billion.
The first quarter proved a boon to active managers at Pimco, BlackRock, Capital Group, PGIM, JPMorgan, Fidelity Investments, Janus Henderson Group, and even index-giant Vanguard Group, which offers some actively managed strategies. Not all active strategies benefited, however, with big funds managed by Western Asset, Doubleline and TCW unable to stanch outflows, according to Morningstar Direct data.
BlackRock, with US$2.8 trillion in fixed-income assets, netted US$42 billion to bond funds in the first quarter, accounting for 55 per cent of net inflows to the firm’s long-term investment funds. Investors added about US$9 billion to the firm’s active bond funds, the fastest pace in a year. They poured US$18 billion into BlackRock’s fixed-income ETF products and US$14 billion into its non-ETF bond index strategies.
Capital Group, with about US$507 billion in fixed-income assets, attracted about US$10 billion of net flows in its global fixed-income business, also the best pace since early 2021.
At Wilshire Associates, which advises institutional investors on US$1.2 trillion and manages about US$86 billion itself, clients are seeking more help finding portfolio managers for traditional core and core-plus bond strategies, according to Will Beck, senior vice-president for traditional fixed income research.
Charles Schwab’s investing platform tells a similar story. Investors added a net US$15.4 billion to active fixed-income mutual funds and ETFs in the first quarter and US$8.2 billion to passive ones.
Active advantage
Active bond managers typically try to outperform the Bloomberg Aggregate bond index by shifting exposure to Treasuries, mortgages and corporate bonds – the three big areas in which relatively small changes can lead to higher returns than the broader market.
While active managers exude confidence they can navigate the economy, elevated inflation and the winding path of Fed policy, their toughest challenge might be from simple money market accounts, which yield over 5 per cent with little risk. They’ve netted about US$80 billion so far this year, according to the Investment Company Institute.
Rob Kapito, president and co-founder of BlackRock, told analysts this month that at least for now, the yields on cash are “very attractive” and “are causing the delay in more allocations to fixed income”. At the same time, there’s growing interest in high-performing active funds, he said, “so I think that we stand to bode very well once you see some changes in the yield curve”.
The other big challenge to active funds is the rise of low-cost passive strategies and ETFs that track parts of the bond universe. While the pace of passive bond inflows has eased, they remain positive and are coming off a very big year.
Passive accounts for 43 per cent of the market, and “by 2027, they will outweigh their actively run counterparts, as has already occurred with equities”, Morningstar’s John Rekenthaler wrote this month.
Investor patience for bonds may be increasingly challenged if this year’s losses of about 3 per cent for the US Aggregate index, the Treasury and corporate debt sectors deepen. As the outlook for rate cuts dwindles, so does the prospect of a capital gain boost from owning bonds. For now, though, active managers are feeling upbeat.
“The ability to not just blindly buy the index but be smarter and choose around security selection is critical at the moment,” said Stephen Bartolini, portfolio manager at T Rowe Price Group. BLOOMBERG
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