UK active bond funds outperform passive counterparts this year

Jonathan Webster-Smith, CIO quoted in FT Adviser 31st October 2022 

UK active bond fund managers have outperformed passive bond funds over the year to date*, during a crisis period in the bond market, says Bowmore Asset Management.

A study by Bowmore found that actively managed bond funds have returned an average year-to-date of -22.41%, compared with an average of -26.15% for UK passively managed bond funds.

The 800 UK bond funds covered by the research included those investing exclusively in Gilts, in corporate bonds, in UK high-yield bonds as well as in diversified UK bond funds.

Jonathan Webster-Smith, Chief Investment Officer at Bowmore Asset Management, explains that actively managed funds were able to start rebalancing portfolios towards shorter duration bonds and away from longer duration bonds as interest rate rises started to accelerate.

Longer duration bonds normally lose value faster than short dated/shorter duration bonds when interest rates increase. Pivoting exposure from long to short duration bonds is likely to protect returns during a period of rising interest rates. Index tracking funds would not be able to enact such a change, as the market duration of the bond index will be unlikely to have changed over the period.

Jonathan Webster-Smith says that those who rely on index linked passive funds are likely to be buy and hold investors. Jonathan Webster-Smith adds that given the unprecedented falls in bond markets as interest rates rise, index-linked passive funds have not been the place to be for investors and are unlikely to be so for the next six to 12 months. Jonathan Webster-Smith suggests that active managers have the best chance to emerge from the bond market sell-off and react appropriately, given the speed of market movement in terms of market falls and short-lived rallies.

Says Jonathan Webster-Smith: “The bond market has been a disaster in recent months, with investors suffering heavy losses. The best active fund managers can insulate a portfolio from the worst of a turbulent market by taking decisive action.”

“A lot of investors reliant on passive bond funds have been left with the unenviable choice of selling and crystallising losses or holding and hoping the fall in bond prices doesn’t last too much longer.”

“While passive bond funds do have a part to play for many investors – particularly during more benign market conditions – falling markets can allow the best active managers to prove their value through outperformance.”

Passively managed bond funds with poor returns in 2022

*17/10/2022, data from Morningstar

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