ETF Edge

Active bond funds tend to beat stock-based peers. One top manager on strategy and interest rate outlook

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How one active bond ETF manager is beating his benchmark
How one active bond ETF manager is beating his benchmark

Stock pickers don't tend to beat indexes, but active bond fund managers are doing a bit better, according to Morningstar.

Around 84% of active bond fund managers outperformed in the one-year period that ended on June 30, 2021 versus just 47% of active equity fund managers, a semiannual Morningstar report found.

Though the gap narrows over longer time periods — just 27% of active bond funds beat their benchmarks in the last 10 years versus 25% of active equity funds — active management does offer some advantages to fixed-income investors, Pimco's Jerome Schneider told CNBC's "ETF Edge" this week.

As Pimco's head of short-term portfolio management, Schneider oversees the world's second-largest actively managed bond ETF, the PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (MINT).

The flexibility to deviate from benchmark indexes is "an incredibly large differentiator" for active bond fund managers, Schneider said.

For example, in 2020 and 2021, many active bond fund managers succeeded by taking on additional credit risk while the Federal Reserve was easing the strain on fixed income markets, he said.

However, with the Fed now indicating it will begin to taper its bond purchases and pull back on monetary support, that additional risk could come back to bite if managers aren't careful, he warned.

He pointed out that in 2008 amid the financial crisis, only about 8% of the Bloomberg Aggregate Bond Index was invested in BBB-rated bonds, the lowest-ranking in the investment-grade category. Now, they account for more than 15% of the index, Schneider said.

"Simply by owning the index, you're owning a lot more credit risk, which may not necessarily be the right positioning to have in this current environment ... with growth moderating and a variety of central bank policies creating a propensity for a little bit more volatility in the future," he said.

Nimble active managers can help reduce that risk and moderate it with the Fed's interest rate timeline still cloudy, Schneider said.

Though the "era of low rates and low volatility has gone by the wayside," near-term swings could lead the Fed to be more patient than expected as it waits for supply chain disruptions and other inflationary pressures to play out in the markets, he said.

"Our forecast for rate hikes is probably still 2023, maybe pushed very into late 2022," Schneider said. "Right now, we think that inflation begins to moderate and that will give the Fed a little bit more leniency in terms of how they respond to the current conditions."

These actively managed ETFs are outperforming despite persistent challenges
These actively managed ETFs are outperforming despite persistent challenges