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Facing outflows amid the much publicised departure of longtime CEO Bill Gross and an increasing trend toward passive fund management. Pimco has come out fighting, saying some fixed income managers can meaningfully add to returns.
Pimco pensions strategist James Moore defended active bond management, in a piece posted on the firms website. In which he refutes comments made by the legendary advocate of index-based investing, Jack Bogle.
Moore was referring to a recent television appearance by Bogle in which he said the arguments for index investing hold just as much for bonds as stocks.
Bogle’s argument is based on some basic math: In sum, the performance of all investors aggregates to the performance of the markets. For every winner, there must be some loser who is subsidizing the winner’s gains. Throw in fees, and the average net return above the market for active investors is negative.
“The key question for investors is, ‘Do I have a strong reason to believe my active managers will add value in excess of their fees’,” asked Mr. Moore. “I would not argue that all do or even that a majority do, but those manager who understand and exploit the five reasons I list, plus a host of others, stand a good chance.”
Moore offered a series of reasons why “the common wisdom” about the superiority of so-called passive investing might not extend to bonds. Here are five important ones:
1. A significant fraction of investors in fixed income markets have primary objectives that differ from maximizing mark-to-market total returns.
2. Unlike equity indexes, where the market determines the weights, in bond indexes issuers principally determine the weights.
3. The new issuance market is much more important for bonds than equities.
4. Most bond trading is done via over-the-counter transactions and not on exchanges.
5. Individual bond returns are highly skewed versus stock returns, which are more symmetric.
You can read Moore’s full article here.
Todays Other Top Stories
Learn Bonds
Learn Bonds: – Bond theory from the Bond Squad. – Our focus this year has been on economic data, fiscal and monetary policy and financial market conditions. However, we have received many questions from readers regarding the callability and price sensitivity of fixed income securities. As such, the focus of this week’s “In the Trenches” report is bond theory.
Municipal Bonds
Income Investing: – ‘Overbought’ Muni Bonds Warrant Caution – MMA. – Municipal bonds have been dutifully tagging along with Treasuries as the latter have rallied in recent weeks, with high-grade muni bonds gaining 0.6% last week and 1.45% so far this month, per Bank of America data. That’s left the muni market looking a bit rich to some people, including Matt Fabian of Municipal Market Advisors.
Bloomberg: – Loomis’s Fuss says munis ‘tough to beat’ for wealthy bond buyers. – Individuals paying the top federal tax rate, which is the highest since 2000, are hard-pressed to find investments that can outperform municipal bonds, said Dan Fuss, vice chairman of Loomis Sayles & Co.
Bond Market
MarketWatch: – Robots haven’t taken over the bond market yet. – Trading in the bond market may be starting to catch up to the times, but we’re far from a world where all bond prices are quoted by R2-D2.
Bloomberg View: – A little volatility can be good for you. – Gyrations in financial markets are giving rise to a plaintive cry from investors: Prices are getting more volatile because new regulations are making big banks less willing to buy when others want to sell.
Reuters: – Exclusive: ECB looking at corporate bond buys, could act as soon as December – sources. – The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin purchases early next year, several sources familiar with the situation told Reuters.
Treasury Bonds
Trustnet: – Beware “extremely expensive” bond market, warns Brookes. – The recent rally in government bonds following the sell-off in equities has left US treasuries and gilts “extremely expensive”, according to fund experts, who warn that investors are making a big mistake if they were to dip into sovereign debt at this level.
WSJ: – Goldman Sachs, J.P. Morgan lower views on year-end Treasury yields. – (Subscription) Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. cut their year-end interest-rate forecasts, becoming the latest Wall Street firms to bow to the reality of falling bond yields among dimming global-growth projections.
The Guru Investor: – Top bond manager sees rates going lower … and lower. – Hoisington Investment Management has been successfully betting on Treasury bonds since the late 1990s, helping put its Wasatch-Hoisington US Treasury fund in the top 1% of funds in its class over the past decade as interest rates have tumbled, according to Morningstar. And it doesn’t see interest rates rising anytime soon.
Investment Grade
FT: – Corporate bond sales recover as turmoil wanes. – Global corporate borrowers are returning to the US debt capital markets after sales of new bonds collapsed last week in the aftermath of a sharp sell-off in equities and a spike in volatility.
Donald van Deventer: – 3 reasons why Kinder Morgan Energy Partners is the best value long bond trade. – We rank the issues of 20 years or more in maturity by the ratio of credit spread to default probability. Kinder Morgan Energy Partners tops the rankings due to three things that are dependent on low credit risk: ability to issue long maturities, high trade volume, and best spread-PD ratio.
Emerging Markets
FT Adviser: – Emerging market bond inflows may start ‘reversing’. – Mike Riddell, the government bond tsar at M&G Investments, has warned of a potential crunch in emerging market local currency fixed income.
Bloomberg: – Pimco sticks to bullish Brazil call after buying up bonds. – Brazilian economic policy is set to improve regardless of who wins the country’s presidential election this weekend, supporting asset prices, according to Pacific Investment Management Co., which manages the world’s biggest bond fund.
ETF Trends: – One country EM bond ETF investors need to watch. – There is not a Venezuela-specific ETF on the market today, which in the eyes of some short sellers is probably too bad given the recent plunges by ETFs that track other Organization of Petroleum Exporters (OPEC) member states. Venezuela does, however, figure prominently in some emerging markets bond ETFs.
Catastrophe Bonds
Reuters: – Extreme mortality bond testing investor view on pandemic risk. – An extreme mortality bond, which pays investors if a pandemic, a major terrorist attack or even a war causes more deaths than statisticians expect, is being quietly marketed to global institutional investors.
Investment Strategy
ETF Trends: – Solving the Fed riddle with new bond ETF ideas. – Treasury ETFs have soundly outpaced popular asset classes such as equity-based ETFs and junk bond funds, but with the end of the Federal Reserve’s monetary easing regime, the time is now for investors to start evaluating ETFs for the next rate cycle. Street Global Advisors Research Strategist Matthew Bartolini, CFA and Portfolio Strategist Andrew Goodale discuss specific ETFs that advisors and investors can use in preparation of what could be a “new look” Federal Reserve in 2015.
Focus on Funds: – Ned Davis: With high-yield in play, consider shorter duration funds. – Earlier this month, Ned Davis upgraded high-yield bonds to an Overweight from a Marketweight. In a recent report, analyst Joe Kalish argued that spreads had become favorable and support owning higher-yielding bonds.
Financial Planning: – Should you be building bond ladders? – Bond ladders work well when rates are rising, giving wealthy investors sequential opportunities to exchange maturing low-rate debt instruments for higher-yielding paper. Rates are low now, but they will go up eventually — perhaps even next year, if the U.S. central bank starts nudging short-term rates higher, as many Fed watchers expect.
Wall Street Daily: – Four severely flawed portfolios. – If you can predict the future with certainty, then stop reading. This article isn’t for you. But if you’re simply human, like the rest of us, you shouldn’t construct your portfolio as if you’re Nostradamus.
ETF Database: – How to build an income portfolio with ETFs: Insights from David Fabian. – Investors who rely on the current income stream from their portfolios have likely been thinking of prudent ways to more favorably re-position their holdings over the coming months. We recently had an opportunity to talk with David Fabian, a managing partner at FMD Capital Management, whose firm specializes in actively managed ETF portfolios. David offers his insights below on how investors can utilize ETFs to build an income portfolio.
Bond Funds
Investopedia: – Will ETFs eventually replace mutual funds? – Mutual funds have been the mainstay for retail investors for decades. But will they stay that way? There are lots of options now such as exchange-traded funds (ETFs) and even hedge funds for the exceptionally wealthy.
ETF Trends: – Schwab continues prolific ETF asset-gathering pace. – Charles Schwab (NYSE: SCHW), the largest U.S. discount brokerage firm, continued its torrid pace of exchange traded funds asset-gathering in the third quarter thanks to increased inflows from retail investors and traders.
Riabiz: – Schwab phones some Private Client customers to advise dumping PIMCO Total Return fund. – Charles Schwab & Co. is advising Schwab Private Client customers to move their assets out of the PIMCO Total Return fund. The San Francisco-based RIA, which manages $58 billion in 142,000 accounts, has reached out to customers by telephone with the suggestion to yank all assets in the fund formerly managed by Bill Gross and move them to lower-expense ratio funds and stable management teams.
Bloomberg: – Former Pimco parent Pacific Life moves accounts to Janus. – Pacific Life Insurance Co., the insurer where Pacific Investment Management Co. was started as a bond unit in 1971, is moving money from Gross’s old firm to the one he joined last month, Janus Capital Group Inc. (JNS).
Gross:How do countries delever? 1)real growth 2)low/negative real int. rates 3)default. Only seeing 2 and 3, creditor/stakeholder unfriendly
— Janus Capital (@JanusCapital) October 21, 2014
NJ bonds are in the “Tunnel of Love” phase as only true fans know the genius of the opportunity now…”Better Days” coming..
— Michael Pietronico (@MillerTabak) October 21, 2014
First Fed rate hike not fully priced in until Nov-Dec 15 and VERY slow trajectory from there with target rate 2.50-2.75% over next 5 years
— AnthonyValeri (@Anthony_Valeri) October 21, 2014
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