Active Fixed Income Illusions

Abstract

Over the past 20 years, active fixed income (FI) managers have tended to deliver returns in excess of their benchmarks. This has generated a popular notion that active investing in fixed income markets is ‘easy’. Our aim is to assess the veracity of that notion. Across a broad set of popular active FI categories, we find that passive exposures to traditional risk premia (especially exposure to credit risk) explain the majority of FI manager active returns. The resulting implication is that, contrary to popular belief, traditional discretionary active FI strategies offer little in the way of true alpha, and that traditional active FI strategies may significantly reduce the strategic diversification benefit of FI as an asset class.

Keywords: fixed income funds, fixed income allocation

JEL Classification: G12; G14; M41