When it comes to bond funds, says a recent article in The Wall Street Journal, “bargain shopping may not be the best idea.”
Higher-priced portfolios assembled by active money managers, it reports, are “handily beating the cheaper index-tracking competition, largely because they are doing a better job protecting their portfolios from rising interest rates.” Citing Morningstar data, the article notes that 70% of fund managers who choose intermediate-term bonds are outperforming their passive peers, adding, “only 36% of U.S. stock pickers can make the same boast.”
This is an interesting trend, particularly in a rising-interest-rate environment—rising rates chip away at the value of existing bonds since newly issued ones offer higher payouts to investors. The article quotes Richard Bernstein Advisors portfolio strategist Dan Suzuki: “We’ve been saying for a while that the biggest risk in portfolios isn’t equity volatility but rising risks for bonds.”
Active portfolio managers, the article says, have been “steadily shifting toward short-term debt, which is less vulnerable to losses from rising rates and inflation.”
The concern for the mom-and-pop investors that have “gobbled up passive funds in recent years,” is that they may not realize that the bonds they considered a safe-haven are vulnerable to rising rates, and seeing declines across all assets classes might trigger nerves and lead to panicked selling.
For more trends in fixed income, visit the Fixed Income Channel.