The Role of Active and Indexing in Fixed Income Portfolios
In the world of investment management, the active versus indexing debate is a longstanding one. The discussion has evolved over time, and one of the most enduring questions we field is whether active management or indexing makes more sense for certain fixed income sectors, and for the asset class as a whole.
For a long time, active strategies dominated the entire investment landscape. As indexing options developed, investors came to value the efficiency of indexing and the lower costs inherent in such strategies. Investors have shifted their allocations accordingly, particularly in equities. Unlike equities, however, the fixed income market is incredibly diverse and complex. Often, pockets of this market are illiquid or virtually impossible to access. As a result, investors in bonds can benefit from the experience and skills of investment professionals.
As we focus attention in this piece on fixed income investing options, there are two points worth emphasizing at the outset:
- Market expertise is required for both indexed and active fixed income investing.
- Asset managers that possess expertise across a breadth of capabilities and investment disciplines can most effectively deliver solutions to investors.
Understanding the challenges that investment managers face in each bond sector is important, as are the techniques that are utilized to meet investors’ objectives. Investors armed with this knowledge can determine what risks they are comfortable with and what their return objectives are. An asset manager with broad active and indexed capabilities across fixed income sectors and geographies can allocate to sources of risk and return from various markets to fulfill unique client objectives. Recognizing when an active or indexed approach to bond investing makes sense can be invaluable for investors.