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Economy

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Asia markets tentative ahead of Opec meeting

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

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Categorized | Capital Markets

Bond fund managers help limit clients’ post-election losses


Posted on November 24, 2016

Managers of the largest US bond funds have helped limit the damage to their clients’ savings from the post-election market rout, in a rare — albeit limited — piece of good news for advocates of active management.

Nine of the top 10 largest “core” bond funds, which are designed to be the linchpin of a saver’s fixed-income holdings, outperformed the bond market benchmark in the 10 trading days after Donald Trump’s victory, according to an analysis of data from Morningstar.

That came against the backdrop of tumbling bond prices, as investors adjusted to the idea that interest rates will be higher if President Trump’s proposed infrastructure spending and tax cuts boost inflation. The Barclays US Aggregate bond index, the widest measure of the fixed-income market, returned minus 2.3 per cent over the period.

“If you choose the index, you are going to be about one-third in US Treasuries, which get hit hard when rates start moving,” said Karin Anderson, analyst at Morningstar. “Active managers have many more tools at their disposal.”

The largest active mutual fund, Pimco’s $83bn Total Return fund, matched the index over the two weeks following the election, while its nine nearest rivals beat the index by amounts ranging from 2 basis points, in the case of the T Rowe Price New Income fund, to 82 basis points, in the case of the DoubleLine Total Return Bond fund.

The largest bond fund in the US is the Vanguard Total Bond Market Index fund, which aims only to track the bond market rather than to beat it. In contrast to the outperformance by most active funds, it slightly underperformed the Barclays Agg, falling 2.4 per cent over the 10-day period.

Core bond funds can lean more heavily on corporate debt, mortgages, junk bonds or overseas bonds to try to beat the index when rising interest rates are weighing on the long-dated Treasuries that make up much of the wider market. They are also able to emphasise shorter-dated bonds that are less sensitive to interest rates.

Steve Kane, co-manager of the $80bn MetWest Total Return Bond fund, said his fund’s tilt towards shorter-dated instruments helped it outperform after November 8, even though it does not view Mr Trump’s election as significantly improving the economic outlook.

“We have a laundry list of concerns,” Mr Kane said. “There is excess leverage, our major trading partners are mired in weak economic conditions and there are major excesses in China, not to mention that the strong dollar can cause negative feedback consequences to emerging markets and then back to the US.”

The prospect of an extended period of rising interest rates will inflame the debate about indexing in the bond market. While studies have proven that almost all actively managed equity funds underperform the index over the long run, the data are more equivocal in the bond market.

Nonetheless, index tracker funds continue to take market share from actively managed bond funds. Morningstar figures show that while $15bn has flowed into actively managed US bond funds in the past year, $135bn has flowed into passive funds, even though passive funds make up a much smaller percentage of the market.