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Fixed Income Indexing: Additive in a Global Multi-Asset Portfolio

Head of Strategy & Research, APAC
Senior Investment Strategist

  • The shift from active to indexing is one of the more enduring investment trends over recent decades, but this move has been slower to gain traction in the fixed income arena.
  • Better performance by active managers versus their respective benchmarks, particularly in multi-sector active strategies, such as investment grade short, intermediate and global income funds, is likely behind the slower shift to indexing.
  • Active global aggregate managers have generated excess returns of 48 basis points (net of fees) per annum over the last 20 years, but performance typically lags during market selloffs and rallies in marketrecoveries.

One of the more enduring trends we’ve seen across markets has been the shift from active managers into passive — this is a phenomenon that has been relentless across both equities and fixed income (see Figure 1). At the end of 2020, passive investment accounted for about 50% of total equity investment (based on the US fund universe), but only about 35% of total fixed income. The shift to fixed income indexing has lagged equities historically, and that continues to be the case, with slower adoption being something that can be partly attributed to it being generally harder to replicate fixed income indices given the large number of securities. However, we believe that relative performance (after fee considerations) has been the main reason for the comparatively slower move to indexing in fixed income.

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