Pimco has added fuel to the active-passive debate after it found active bond funds had tended to beat index tracker rivals over a 10-year timeframe.
The asset manager found that active bond funds had largely outperformed the median passive bond fund over one, three, five, seven and 10 years.
Research from Pimco revealed that 63 per cent of active bond funds had outperformed the passive bond vehicles over the past five years.
By comparison, only 43 per cent of active equity funds had outperformed their passive peers over the past five years.
The active manager explained this by pointing out that a large proportion of bond investors are central banks, commercial banks, and insurance companies.
Passive funds have been rapidly rising in the popularity stakes as investors increasingly shun expensive active funds.
However, Pimco stressed that passive and active funds are both important to keep the market balanced, adding: “At a macro level, we believe that a purely passive market would cause severe market risk and resource misallocations.”
The group warned that passive management could encourage “free riding” and could prompt a “flurry of moral hazards”, such as governments delaying needed reforms because they are borrowing at artificially lower spreads, and corporations misusing cash which they have over-borrowed.
“Although on the surface low-fee passive vehicles may benefit savers and pensioners, the reality is more nuanced.”
The report also highlighted that active managers play an important role in allocating capital efficiently, but warned there are times when they overinvest in research.
“Having a healthy number of passive choices keeps this in check,” the study read, pointing out that investors can screen out active managers that charge higher fees without adding value.
Nic Round, chartered financial planner at Trēowe Wealth Advisers, said it was "impossible" for active funds in aggregate to beat the market over a long timeframe.
"I have no doubt some active funds could have outperformed, hopefully net of fees, but the longer the time horizon, the harder it gets to maintain outperformance," he said.
"This why there are few fund managers anyone can name who have outperformed over 15 years or more."
katherine.denham@ft.com
