The Role of Active Management in the Bond Market

Why challenges to indexing the bond market makes reasonably priced active management attractive.

The bond market is fertile ground for active management, and that is unlikely to change any time soon. Fairly-priced active management in fixed income makes sense for fundamental reasons rooted in the nature of bond markets. Limited ownership of bonds, infrequent trading, and the complex ways cash flows are often structured, frequently lead to inefficiencies that adept active managers can exploit. 

Passive investing can be effective in liquid, higher-quality, and homogenous parts of the bond market. Yet, limitations of index coverage and real-world distortions have made indexing major parts of the global bond market unpalatable. Securitized sectors, sometimes customized to meet narrow buyer bases, such as those of collateralized mortgage obligations, can produce complex tranches that are often more volatile or illiquid than plain vanilla securities. Their complexities can also lead to inefficient trading and pricing. 

Download the report to understand why the case for reasonably priced active management remains robust.

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