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Combining Active and Indexed Fixed Income : Create Better Outcomes in Multi-Asset Portfolios

Head of Strategy & Research, APAC
Senior Research Analyst

The Active vs Passive debate has been a longstanding feature of the investment landscape. Within the fixed income universe, the arguments have become more nuanced, particularly as the indexed approach has eaten into the market share of active managers. But investors have increasingly recognised that it is not an either/or debate; both fixed income approaches have a place in investors’ multi-asset portfolios.

Key points to note:

  • Active managers in multi-sector strategies have generated healthy outperformance versus the benchmark (alpha), while single-sector active strategies have struggled. However, most active managers have failed to produce alpha in consecutive years.
  • Our analysis suggests that fixed income active managers tend to underperform during equity sell-offs, implying poor diversification when it is needed the most.
  • There has been a shift towards fixed income indexing as institutional investors consider a core-satellite approach that combines strategies of different sectors/durations to give them more allocation flexibility and to improve portfolio efficiency.

The bottom line: By incorporating some indexing elements in both FI core and satellite programs and utilizing indexing to rebalance a portfolio, we demonstrate that we can improve the portfolio’s return/risk ratio by lowering the portfolio risk but without sacrificing the portfolio return.

Learn more about the benefits that can accrue to investors by diversifying fixed income exposure with the addition of indexed strategies.

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