Views of our experts

Active bond management can outperform

Optimal selection of active managers is one of the keys to dealing with the normalisation of monetary policies and the accompanying adjustments in valuations.

2022 is characterised in particular by the policy changes of the US Federal Reserve and the ECB, which have committed themselves to mechanisms for tightening their key rates in order to combat inflation. In the bond universe, these new policies have triggered a strong upward movement in interest rates across all government curves, along with significant credit spreads.

As a result, the Bloomberg index of US sovereign bonds is down by more than -10% since the beginning of the year, while its global counterpart is down by more than -16%. Likewise for the overall credit index, which is also down by more than -18%! In the equity universe, the uncertainties surrounding these rate hikes have also caused substantial damage, with the S&P 500 falling by around -17%, as did its European counterpart the EuroStoxx 50.

Against this background, an investor using passive management tools would experience the same negative performance for each asset class. An investor who favours active managers, on the other hand, would have the opportunity to out-perform. Taking the case of a fixed income strategy based on government curves, a fund positioned with a negative duration exposure from the start of the year will have generated a positive absolute performance against a negative performance for the benchmark. The same applies to the credit universe, where a qualitative selection and dynamic allocation to certain types of issuers will have also reduced exposure to those parts of the market that have experienced the most significant declines, such as the high-yield bond universe.

In the equity markets, a dynamic management of the exposure to growth stocks in favour of value stocks at the beginning of the year will againhave led to a positive relative performance. However, it would be too simplistic to stop there and think that all active management would have been a cure-all. In reality, nothing can be taken for granted and the same concept of active management can lead to underperformance if the selection of managers is not optimised. To avoid this pitfall, a combination of qualitative and quantitative analysis is paramount. This involves verifying a certain number of criteria such as, from an investment point of view, the stability of the management team and the behaviour of the fund in different market environments and, from a more operational point of view, ensuring that the manager's organisation is solid and that the liabilities are well granulated.

In any case, the coming months still seem to hold many uncertainties (recession? falling inflation?), and against this background, separating the wheat from the chaff will be essential to generate a higher risk/return ratio.       

Author

Xavier Hourcq

Head of Funds Selection