While simply tracking the market (beta) with passive strategies might seem sufficient, many asset managers contend that active management is not just worthwhile, but often necessary given the structural quirks of fixed income indices and the heightened complexity of credit markets.
Perpetual, one of Australia’s longest-serving active investment managers, recently launched its DIFF ETF, a unit class of the $2.4 billion Perpetual Diversified Income Fund (DIF).
“In periods of uncertainty and volatility, active ETFs can play an important role in building a diversified portfolio,” said Greg Stock, Perpetual head of credit research and senior portfolio manager. “Fixed-income investors are facing lower returns due to falling interest rates and inflation and are looking for additional sources of income.”
Highlighting elevated equity valuations, uncertain growth outlooks and rising volatility reflecting geopolitical uncertainty, Stock said: “We feel that risk-focused active management is crucial to success in credit and fixed income markets.”
He believes active ETFs stand apart from passive fixed income ETFs by giving managers the flexibility to respond to changing market risks.
“There are opportunities available in the market to benefit from the mispricing of various investment risks. These risks include, but are not limited to, interest rate risk, credit risk, option risk, liquidity risk and sector risk,” Stock said.
“Passive investment does not offer this flexibility and opportunity to generate excess returns.”
Janus Henderson’s head of Australian fixed interest, Jay Sivapalan, said active ETFs provide “numerous additional tools” beyond interest rate positioning, including the ability to avoid deteriorating credits, overweight defensive sectors, and add credit protection.
“If active management can potentially yield better return outcomes and reduce drawdowns, it presents a compelling case for paying active management fees,” he said.
Janus Henderson listed its Janus Australian Fixed Interest Active ETF (JFIX) in February, citing growing demand for strategies that can navigate shifting macroeconomic and policy conditions.
“Bond volatility has increased dramatically since 2022 due to the increase in inflation and fiscal worries as governments increased their spending during the COVID crisis,” Sivapalan said.
“This provides opportunities for active managers to outperform by choosing the right countries to invest, the right parts of the interest rate curve to take exposure, the choice between nominal and inflation-linked bonds, along with making all allocations between government, semi-government and corporate bonds.”
Schroders’ latest Global Investor Insights Survey – conducted among 995 professional investors from around the world representing $67 trillion in assets – revealed that 80 per cent of respondents are more likely to use actively managed strategies in the next 12 months.
Speaking to InvestorDaily, the firm’s head of multi-asset and fixed income for Australia, Sebastian Mullins, said the case for active management strengthens when markets move from macro-driven rallies to more volatile, micro-driven environments.
“When index strategies performs because of macro factors (low interest rates, abundant liquidity, etc) it may be hard to see the value of active management but during increased volatility, micro factors (individual companies’ earning resilience, for example) is key to building resilient portfolios and this is where active management plays a critical role in portfolios,” he said.
He warned that in 2025, economies are becoming “less synchronised”, with US trade tensions likely to push tariffs and inflation higher, hurting US Treasuries, while rate cuts in Australia and Europe are already priced in.
“It therefore takes an active approach to determine the best value or best opportunity to invest,” Mullins said, adding that the same dynamics apply to credit markets, where higher rates and greater volatility will create “corporate winners and losers”, requiring careful selection to find “pockets of opportunity”.
But not all fund managers agree. Betashares, Australia’s largest fixed income ETF provider, leans heavily towards passive products.
Head of fixed income Chamath De Silva said the group focuses on “enhanced index” strategies to capture much of active management’s value at lower cost.
“We’ve leaned heavily into this labour of indexing called smart beta called ‘enhanced index’. It aims to really capture a lot of the reported value from active but with a lower headline management fee”, he said.
He added that several of the fund’s products within that suite – such as the Australian Composite Bond ETF (OZBD) – have been very successful while still keeping additional fees low.
Despite a lot of noise around the product proliferation of active ETFs, De Silva said flows are still overwhelmingly going towards index tracking products.
“There is still a big focus on costs and building well-diversified portfolios in a very cost-effective manner,” he said.
