Opinions in the active-passive investment debate have drifted poles apart over recent years. We revisit this discussion by contrasting equity and bonds. We look at performance numbers and find that, unlike their stock counterparts, active bond mutual funds have largely outperformed their median passive peers over our sample period. We offer conjectures as to why bonds and stocks differ. Differences may be due to:
•The large proportion of noneconomic bond investors
•Benchmark rebalancing frequency and turnover
•Structural tilts in fixed income space
•The wide range of financial derivatives available to active bond managers
•Security-level credit research and new issue concessions
In short, informational efficiencies make beating equity markets difficult. But we believe that's not the case with fixed income, where noneconomic and passive investors pursue agendas that are not exclusively about total return
Put simply, bonds are different.