Should you invest actively or passively in bonds? Buffett didn’t say anything about bonds, but the same logic should apply—only more so. With lower return potential than stocks, overcoming the impact of management fees and trading costs in bonds should be more difficult, especially should i invest in corporate bonds now the lower-yielding investment-grade arena.
This cruel math seemingly makes a compelling case for investing passively in bonds. The bond market may be doomed to underperformance after fees, but bond fund managers aren’t the only players in the bond market. 100 trillion in bond assets globally, according to fixed income giant PIMCO. PIMCO calls these firms non-economic players because they don’t necessarily invest to maximize returns.
Central banks buy and sell bonds to influence monetary policy, for example, while a bank may hold them for regulatory reasons. Insurers and pension funds may use bonds to match liabilities and cash flows. Active managers, by contrast, can adjust duration and maturity to vary their exposure to interest-rate risk. Before fees, active management makes a good case for itself.
Nearly all active Canadian Fixed Income funds that survived the 10-year period ending July 2017—60 of 100—beat the TMX Universe benchmark. I compare after-fee returns to the ETF because the benchmark returns are cost-free. There’s nothing saying the next ten years will look like the last. Over the past decade, global central banks, including in Canada, pushed interest rates down aggressively. Because interest rates and bond prices move in opposite directions, this policy has been a boon for bonds.