Most fixed-income managers struggled to benchmarks

Research finds widespread difficulty in generating alpha from bets in government and corporate debt

Most fixed-income managers struggled to benchmarks

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.”


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