Research finds widespread difficulty in generating alpha from bets in government and corporate debt
Fixed income is widely seen as an area of advantage for active managers, but it appears even that market is tough to beat.
According to a new report from S&P Global, the majority of active fixed-income managers lagged their benchmarks in the 12 months through June. The sole exception was global income, where just under half of funds (44%) failed to beat their benchmarks.
As reported by Institutional Investor, managers of loan and government long funds were the most challenged: over the one-year period ended June, all such funds studied by S&P failed to outperform. It represents a dramatic drop in performance compared to 2018, when just 17% of government long funds and 15% of loan participation funds were reported as laggards.
US government long funds gained 6.25% in the year through June on average, nearly half the 12.28% reported for their benchmark. Similar underperformance was reported for more than 90% of other US government debt funds, as well as investment-grade long funds.
Among active funds investing in high-yield debt, 83% failed to match their benchmark index. While such funds returned an average 5.59% for the year up to June, the index for US corporate high-yield debt posted a 7.48% average gain.
Loan fund managers, meanwhile, registered an average 2.29% return over the 12-month period. In contrast, their benchmark leveraged loan index managed to produce a 4.2% return.
The pain may not be over yet for fixed-income managers. The research firm pointed to concerns over the US economic outlook, as well as a yield curve inversion involving 3-month Treasury bills and 10-year Treasury bonds in March, which had not occurred since 2007.
And while US President Donald Trump isn’t shy about his wish for the Federal Reserve to move into negative-rate territory — something he claims has proven to be a competitive advantage for other countries — not everyone shares his enthusiasm.
“[W]e believe the rewards from negative rates have so far been relatively modest, while the downside is increasingly evident,” Mark Haefele, CIO of UBS’s global wealth management business, said in a research note. “Negative rates can be harmful to the financial system, with commercial banks forced to pay to park assets with the central bank.”