What We’re Reading Now – November 2018

December 17, 2018

Periodically on this blog we will share a collection of some of the articles we’re reading that speak to the active and passive “debate,” and that help to propel the conversation. Here’s a selection of recent articles we find helpful to the discussion.

Unlike Stock Pickers, Active Bond Managers are Beating the Market, The Wall Street Journal, Nov. 1, 2018

Much has been written on asset classes where active and passive management under/outperform. It’s no secret that less costly, passive indexing has outperformed in asset classes like US Large Cap Equity. But there are areas where active has delivered positive net returns for investors – bonds. And according to Asjylyn Loder, “bargain shopping may not be the best idea when it comes to bond funds.”

ETFS ROUNDTABLE: An active debate, funds europe, 2018

In this roundtable discussion, Bryon Lake, head of international ETF distribution for JP Morgan Asset Management (JPMAM) speaks with funds europe for a 2018 ETF Report. When asked whether active ETFs were the solution that asset managers and clients have been looking for to resolve the active-vs-passive debate, Lake spoke freely about the reasons behind JPMAM’s launch of active ETFs.

“When we launched active ETFs, it actually started from the premise of asking what’s best for the investor and what’s best for the people that manage money on their behalf. Do that first and you can then see it is necessary to have the widest range of tools to help achieve investment objectives. It’s not about active versus passive; that’s painting the world too bluntly.”

Lake cites fixed income as a class that could benefit from an ETF wrapper. “For example, we think active fixed income delivered through an ETF wrapper is a really interesting proposition. One of the things that investors say to us is that they’re concerned with the way that some fixed income indexes are constructed. They think they have limitations and so there is the question of whether some of those limitations could be corrected through an active investment proposition – which we absolutely think they can be.”

In general, Lake sees active as delivered through an ETF wrapper as “an innovation that will help power the industry onwards.”

Active And Passive: A Look Under The Hood, Financial Advisor Magazine, Dec. 6, 2018

Claus te Wildt senior vice president of capital markets strategy for Fidelity Institutional Asset Management equates the decision to buy an actively managed fund to buying a new car. “When it’s time to buy a new car, you’ve likely done your research not just on sticker price but also on its performance and safety features—and you would do the same for a client’s investment portfolio.

Similar to Asjylyn Loder’s story for The Wall Street Journal, Wildt encourages advisors to look beyond fees “and understanding how active and passive funds are structured across different asset classes” to determine the appropriate mix.” Wildt’s compels financial professionals to “[strike] a balance within their investment vehicles.” Fees, he argues should not be the only factor influencing advisors’ investment decisions.

“Today’s advisors face increasing pressure to meet investor demands and build portfolios that minimize cost and generate the most value. Passive investing has many benefits, like broad market exposure at a lower cost—but it’s also important to consider tailored strategies to drive growth and outperform the market.”

Bond Indexes Are ‘Broken,’ Says Franklin Templeton ETF Head, Bloomberg, Jun. 21, 2018

We just came across this piece from June, but think that it's still worth reading now. Patrick O’Connor, who manages Franklin Templeton’s $1.5 billion ETF platform weighs in on actively managed bonds in a Bloomberg News article. He states that fixed income indexes are “broken, making active management necessary for successful bond ETFs.

His rationale? “The weight of individual securities in fixed-income indexes is often determined by debt issued, meaning companies that issue more debt will have a higher weight in an index-based ETF.

“That doesn’t necessarily mean they’re the best companies, but they would be the ones that a passive manager would have to overweight.”

Don Susking, head of the ETF strategy team at PIMCO added an important caveat with respect to the bond market. “There’s whole sections of the bond market you simply can’t access” with a passive ETF, he said, pointing to U.S. non-agency mortgage bonds as one of his preferred investments. “You’re missing out on entire portions of the bond market including what we think are some of the best investments on the planet.”

Sixty one percent of actively managed bond funds outperformed their passive peers in 2017, according to Morningstar.