In the ongoing debate about active versus passive investing, one thing has become clear: the considerations are quite different for equity and fixed income strategies—and there are compelling reasons to choose active for fixed income. Historically, the majority of passive fixed income strategies have fallen into the bottom half of their Morningstar categories. Furthermore, most active fixed income managers have been able to provide excess returns relative to their passive counterparts.
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Often, outperformance is achieved by increasing portfolio risk, however evidence suggests that is not the case for the largest fixed income categories. Using the same methodology as the performance analysis, the Sharpe ratios show the majority of top-quartile active managers offered a better risk/return profile than the average passive manager. In areas that are typically more volatile, such as bank loans and world bonds, managing the ups and downs is even more important—and these are some of the sectors where active managers most significantly outpaced their passive peers.
Read the full paper to understand key drivers of the Fixed Income Active Advantage.
Risk Information—Investing involves risk. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Diversification does not assure a profit or protect against loss in declining markets. These risks may increase a fund’s share price volatility. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. High yield bonds, known as junk bonds, are subject to a high level of credit and market risk. Unlike other investment vehicles, US government securities and US Treasury bills are backed by the full faith and credit of the US government, are less volatile than equity investments, and provide a guaranteed return of principal at maturity. Foreign securities are subject to currency fluctuation and political uncertainty; emerging markets are subject to greater volatility and price declines; and foreign currency may change in value relative to other currencies. International investing can expose investors to certain geographic and economic sectors, thereby increasing vulnerability to a single economic, political, or regulatory development. Actively managed portfolios may carry additional risks, such as that analyses performed cannot always predict outcomes, that the investment techniques applied do not have the expected results, and that external factors can change the course of investment performance. The fees associated with active management may be higher than those associated with passive strategies. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee an investment’s objective will be achieved.
The views expressed herein are those of PGIM Investments at the time the comments were made and may not be reflective of their current opinions and are subject to change without prior notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein.
The indices are presented to provide you with an understanding of their historic long-term performance and are not presented to illustrate the performance of any security. The indices and averages defined above are unmanaged. Investors cannot invest directly in an index or average. Past performance is not a guarantee of future results. Individual investor results will vary.
PGIM, the principal investment management business of Prudential Financial, Inc. (PFI), is comprised of several business units, including PGIM investments. PGIM Investments, a subsidiary of PFI, is an investment adviser and the investment manager to all PGIM US open-end investment companies and manager or administrator to closed-end investment companies. Other PGIM businesses that may sub-advise certain PGIM Investments open and closed-end investment companies include: PREI, Jennison Associates, PGIM Quantitative Solutions LLC, PGIM Fixed Income.
Investing involves risks. Some investments have more risk than others. The investment return and principal value will fluctuate, and the investment, when sold, may be worth more or less than the original cost and it is possible to lose money.
The information contained is being provided as general investment education only and does not take into account the investment objectives or financial situation of any existing or prospective investors. The information should not be construed as investment advice or a recommendation with respect to any security or investment strategy. Investors seeking information regarding their particular investment needs should contact their financial professional.
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1044978-00001-00 Ed 2/2021
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