From
LearnBonds:
Facing outflows amid the much publicised departure of longtime CEO
Bill Gross and an increasing trend toward passive fund management. Pimco
has come out fighting, saying some fixed income managers can
meaningfully add to returns.
Pimco pensions strategist James Moore defended active bond management, in a piece posted on the firms website. In which he refutes comments made by the legendary advocate of index-based investing, Jack Bogle.
Moore was referring to a recent television appearance by Bogle in
which he said the arguments for index investing hold just as much for
bonds as stocks.
Bogle’s argument is based on some basic math: In sum, the performance
of all investors aggregates to the performance of the markets. For
every winner, there must be some loser who is subsidizing the winner’s
gains. Throw in fees, and the average net return above the market for
active investors is negative.
“The key question for investors is, ‘Do I have a strong reason to
believe my active managers will add value in excess of their fees’,”
asked Mr. Moore. “I would not argue that all do or even that a majority
do, but those manager who understand and exploit the five reasons I
list, plus a host of others, stand a good chance.”
Moore offered a series of reasons why “the common wisdom” about the
superiority of so-called passive investing might not extend to bonds.
Here are five important ones:
1. A significant
fraction of investors in fixed income markets have primary objectives
that differ from maximizing mark-to-market total returns.
2. Unlike equity indexes, where the market determines the weights, in bond indexes issuers principally determine the weights.
3. The new issuance market is much more important for bonds than equities.
4. Most bond trading is done via over-the-counter transactions and not on exchanges.
5. Individual bond returns are highly skewed versus stock returns, which are more symmetric.
You can read Moore’s full article here.
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