The Move to Indexing
Why Indexing Makes Sense in Fixed Income
Fixed income indexing has developed tremendously in sophistication, scope and delivery over the past few years.
Indexing’s ability to capture the full performance potential of even the most complex fixed income exposures, in a highly cost-effective way, means that active management is no longer the default choice for fixed income investors.
Pandemic-related market disruption shone a spotlight into the myriad risks embedded in active strategies, arguably only resolved by the large-scale interventions by policy-makers. This has accelerated the case for incorporating indexing approaches alongside active ones.
Once, all investing was active but over time, as index strategies and products were refined, the value and efficiency of indexing has persuaded more and more investors to switch.
This has been strongly the case for equity at least. For fixed income, though, things were different because of market structure and liquidity differences, and the choice was perhaps not such an obvious one initially. The fixed income market was different and deemed too diverse, too complex for indexing to deliver.
For example, large parts of the bond market were illiquid and difficult to access. Without the transparency of the exchange-traded equity markets, fixed income had traditionally been regarded as the domain of active management.
Fast forward to today, times have changed and indexing techniques have evolved sufficiently that investors are increasingly moving to index strategies within their fixed income allocations. Active is still very much there and dominant but it is no longer the automatic default choice for fixed income investors.
Interestingly, the greatest inroads are being made in the more complex parts of the market where active approaches were once understood to be a necessity. As investors appreciate the reliability, transparency and efficiency of index strategies this is now changing.
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