However, fixed income markets have three key players: active and passive managers; non-economic investors such as central banks or pension funds; and insurance funds, which hold bonds for reason of liability matching rather than outperformance.
As this third group is not seeking to maximise returns in the same way an active manager will, so says Pimco, there is a transfer of alpha from constrained players to mutual funds.
Mr Baz further adds that the type of absolute return strategies in which Pimco specialises depend very little on the direction of the Bloomberg Barclays Aggregate index; it relies on off-benchmark positions, mean reversion, currency trading and the use of derivatives.
This can lose or win you money, but it is likely to be a very different beast from a passive fixed income fund in your asset allocation.
Active v passive
This message of being as different from passive as possible is echoed by Royal London Asset Management.
Jonathan Platt, head of fixed income at RLAM, says: “Too many managers run ‘me to’ strategies that are not capable of producing excess returns after fees. This is a problem of both pricing and mindset.
“Basically, an approach of trawling through the same universe of commoditised credit bonds and expecting clients to pay for active management and superior performance won’t wash in the long term.”
Even the proponents of passive management agree on this point.
Ed Gibson, head of financial services at Oxford and London-based financial planners Shaw Gibbs, usually favours passive investing for his clients, but uses active funds for niche, less efficient markets or for reasons of diversification.
“Under normal circumstances, we might be 100 per cent passive in fixed interest,” he says. “But, because of the level of [geopolitical] uncertainty now, we are looking to hedge our bets.”
Calculating how geopolitical events could impact government bonds – which make up 57 per cent of the Bloomberg Barclays Global Aggregate index – is something that active fixed income managers specialise in, so this makes sense.
Robo-adviser Nutmeg also largely uses passive funds for their cheapness and their transparency of holdings, which allows the company greater precision in its asset allocation.
Nutmeg duly relies entirely on passive exchange-traded funds issued by iShares, Lyxor and UBS for much of its assets under management, with the glaring exception of a Pimco short-dated bond ETF.
Shaun Port, chief investment officer at Nutmeg, explains that the Pimco Pan-European Credit fund is a proxy for cash, but with better long-term returns.
He says: “It’s an ultra-short credit portfolio that is effectively a money market fund and has a yield better than cash. It has good long-term outperformance and it gives us a diversification away from UK credit.”