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Bond Flows Get Passive Aggressive
I noticed a remarkable factoid this week that probably should've occurred to me previously: Active bond funds lost more than three quarters of a trillion in assets last year.
2022 was, of course, among the worst years ever for bonds. There was virtually no precedent for losses incurred by US government debt and investment grade credit. In the era of passive investing, large losses for an asset class can erode faith in active management, even as, paradoxically, such periods tend to present more
Most of my bond funds are actively managed. A few are are underwater by a fairly sizeable percentage, others by less than10%. I still favor the notion that active management is better because returns and values can be managed with carefully chosen derivative positions and other strategies. I have a high single digit percentage of my holdings in individual issues, all at good rates, all IG, and several purchased at 75-80% of face, offering essentially guaranteed gains. My income also rises monthly.
My issue with bond funds is that when they have large redemptions, they have to sell the most liquid holdings, and if those are the higher-coupon bonds, they are left with a less desirable portfolio. Also that with an individual issue, assuming no credit issue, you know the price will eventually converge on 100 and when, but a bond fund/ETF price can stay depressed indefinitely.
That said, I’m no bond expert. If I was, I wouldn’t be owning some of the stinking pigs in the portfolios.
Several years ago AQR wrote a piece arguing that a large part of the “alpha” that core active bond mutual funds claim is simply down to going beyond the benchmark’s IG universe into areas like high yield and leveraged loans (i.e. just structurally taking on more credit beta).