Active Equity Fund Managers Stuck in the Rough, While Active Bond Managers Tend to Stay on the Fairway

Since the launch of the State Street Global Advisors S&P 500 exchange-traded fund (SPY) in 1993, passive, index-replication portfolio construction has been widely adopted and represents the common investing experience of John and Jane Q. Public. Passive equity index investing has been a boon to investors small and large, enabling the ownership of thousands of individual issues at a low cost[1], through a single trade.[2] In the quarterly publication S&P Indices Versus Active (SPIVA) Scorecard, S&P Dow Jones Indices monitors the performance of actively managed mutual funds and ETFs relative to their stated benchmarks.[3] Across 17 domestic equity management styles, from large-cap to multi-cap blended fund, 63.43% of actively managed funds underperformed their benchmarks in 2017. Over 10 years, on an annualized basis, an average of 86.65% of actively managed equity funds underperformed their benchmarks through 2017. Thus, individual investors have embraced passive indexing, and with good reason.[4]

The narrative is different for active bond managers. A supermajority of actively managed investment-grade intermediate bond funds, benchmarked against the Barclays US Government/Credit Intermediate Index, bested their bogey last year. Specifically, 68.63% of the investment-grade intermediate bond funds monitored by the SPIVA Scorecard generated returns superior to their benchmark. On a 10-year annualized basis, 48.94% hit a birdie. Drawing from Morningstar historical statistics, research compiled by PIMCO tells a similar story: “The percentage of active bond funds and ETFs outperforming their median passive peers over the past 1, 3, 5, and 7 years all exceeded 50%; more than half outperformed their median passive peers over the past 10 years.”[5]

Perhaps “bond-picking” is the new “stock-picking”? With the Fed winding down QE and pushing short-term rates upward, can active bond managers #MakeBondsAttractiveAgain?