Vanguard rejects bond management ‘myth’

Vanguard rejects bond management ‘myth’

The notion that bond portfolios must be actively managed in more volatile environments is a 'myth' peddled by active managers chasing FUM, argues Vanguard's head of investment strategy.


In a presentation to investors, Jeffrey Johnson, Vanguard Asia Pacific head of investment strategy, was asked whether investors should take a more active approach to bonds in a 'volatile and challenging environment' for fixed income.

"I think what investors need to keep in mind is where’s that message really coming from," Mr Johnson said.

"It’s usually coming from the active managers, who would like you to entrust your assets to them. Now whether or not that is true, we think it’s probably a little bit of a myth and some of that comes out in the data."

Mr Johnson referred to a chart that showed more than half of actively managed mutual funds underperformed their prospectus benchmarks over one-, three-, five-, 10- and 15-year time periods.

When adjusted for 'survivorship bias' (ie. the tendency for closed or merged funds to be excluded from the data) almost 90 per cent of active bond managers underperformed their benchmarks over a 15-year basis, he said.

A "big reason" for that long-term underperformance is cost, Mr Johnson said.

"In an asset class where expected return may only be in the three per cent range or so on a go-forward basis, having a marginally higher cost chews up a much larger percentage of your expected return," he said.

Mr Johnson also questioned the widespread assumption that bonds are overvalued, pointing out it rests on the assumption that interest rates are set to spike "much higher" from their current "moderate" levels.

"We’re not quite so sure that’s going to be the case," he said.

"Certainly in some markets globally – mainly in the US – there are markets where interest rates might be headed higher, but here in Australia rates are likely headed lower.

"But here in Australia rates are likely headed lower by the RBA given some of the vulnerabilities of the economy. Other central banks around the world like Europe and Japan are pretty stable so we don’t think the environment is necessarily as scary [as people think]," he said.

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