10-year returns of median U.S. active and passive managers
fig.1 Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016. Source: Morningstar
Based on Morningstar U.S. Intermediate-Term Bond Category for fixed income and Morningstar U.S. Large Cap Blend Category for equities. Institutional share class.
1Core Fixed Income: Bloomberg Barclays U.S. Aggregate Index; Core Equity: S&P 500 Index
fig.1 Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016. Source: Morningstar
Based on Morningstar U.S. Intermediate-Term Bond Category for fixed income and Morningstar U.S. Large Cap Blend Category for equities. Institutional share class.
1Core Fixed Income: Bloomberg Barclays U.S. Aggregate Index; Core Equity: S&P 500 Index

Bonds Are Different

Structural elements create opportunities for active managers

The differences between stocks and bonds, including how they trade, create bond-market specific headwinds for passive strategies – giving active managers more of an edge in fixed income than in equities.

Over-the-counter trading: differences in how bonds and equities trade

Stocks trade roughly 45 times more than the most liquid investment grade corporate bonds in a day - and the size of those trades are considerably smaller.

Typical Trades Per Day

Average Trade Size ($)

  • Most Liquid Investment Grade Corp
  • Most Liquid High Yield Corp
  • NYSE/NASDAQ Stocks
fig.2 As of 31 December 2016
Source: McKinsey, NASDAQ, QMX, NYSE Euronext, FINRA TRACE

Why go active now?

Lower expected returns makes alpha more important than ever

Forward-looking index returns, over a five-year horizon, have historically been closely correlated with the index's yield at the start of each measurement period. By going passive today, your bond portfolio is likely to return today's yield (less than 3%) more or less, minus fees, annually.

Correlation between yield and five-year forward looking returns
 
 
fig.3 Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.
fig.3 Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.
fig.3 Past performance is not a guarantee or a reliable indicator of future results
As of 31 December 2016
Source: Bloomberg, Barclays. Yield and return is for the U.S. Aggregate Bond Index.