Active management of fixed income investments offers the potential for investors to realize portfolio outperformance (alpha) relative to a benchmark over a full market cycle. In aggregate, active managers have succeeded in delivering alpha; however, during historic periods of heightened risk-asset volatility, our research suggests that outperformance can quickly shift to underperformance. While rapid market drawdowns often reverse quickly, many investors turn to fixed income for liquidity amidst such volatility – effectively locking in their losses before any recovery begins.
In this paper, we study fixed-income return data to understand the behavior of both asset owners and active managers in crisis periods (i.e., periods characterized by a sharp correction in risk assets). Based on this analysis, we believe that an investment strategy which combines active and indexed fixed income exposure offers the benefit of flexibility to investors, by preserving the long-term out performance potential of active management, while providing the risk mitigation and predictability afforded by index management.