Now more than ever, strategy plays an even bigger role in the bond markets than simply opting for a fund that gives generalized core bond exposure. This problem is magnified when low yields in Treasury notes are making the environment a challenging space, but getting active with fixed income funds can help investors find those better-than-average yields.

“The decade-long bull market has made a strong case for passive investing in equities, and some of this sentiment has convinced many fixed income investors to do the same,” wrote Dan Henken, vice president of Securian Asset Management, in Financial Advisor. “But the arguments for passive equity investing don’t fly for passive fixed income investing. As economic growth slows in the U.S. and around the world, it may be signaling the end of the current credit cycle, which may increase risk for passive fixed income investors or those who invest in actively managed fixed income funds that use the Bloomberg Barclays U.S. Aggregate Bond Index (the BarCap Aggregate) as a bogey. A better choice may be to consider nimble and flexible active managers who offer a more selective approach offering greater defense against economic recession.”

When it comes to choosing a fund, Henken points out that smaller funds have an advantage over larger funds in terms of the number of positions it must hold.

“Among active fixed income managers, those whose funds have relatively low level of assets relative to funds with higher assets under management have certain advantages,” Henken wrote. “They’re not pressured to hold hundreds or thousands of positions to keep the portfolio fully invested. They can identify yield premiums by using technical analysis to identify dislocation and mispricing opportunities within sectors or among individual securities. Their mandates often allow them to take advantage of yield premiums offered by private placements and other alternative investments. And when recessions occur, their smaller portfolios enable them to exit positions more efficiently and thoughtfully than larger firms that must quickly make hundreds of trading decisions to generate liquidity to accommodate outflows.”

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