Passively managed domestic fixed-income assets surged in 2016.
Pensions & Investments' annual survey of institutional money managers found U.S. institutional tax-exempt assets managed internally in indexed domestic bond strategies rose 16.8% for the year, to $639.4 billion.
A 39.8% increase to $169.3 billion in 2016 made Vanguard Group Inc. the largest passive domestic fixed-income manager in P&I's universe. Vanguard's passively managed domestic bond AUM has significantly increased in recent years, with 2016's total more than double the firm's $80.7 billion in 2012.
“In general, what you've seen over the last few years is continued adoption of passive fixed income in the space traditionally associated with equity investing,” said Josh Barrickman, Vanguard's Malvern, Pa. -based principal, senior portfolio manager and head of fixed income indexing Americas.
Investors are looking for the same quality in passive fixed income that they have come to expect from equity index strategies but constructing passive bond funds is less straightforward than tracking an equity index, Mr. Barrickman said.
“Passive investing in the bond market is different than what you see in equities. There's a lot of technique and experience that comes into play and we feel very good about our ability to deliver a quality passive bond product. (AUM growth) is a consequence of that,” he said.
BlackRock Inc. was the second-largest passive domestic fixed-income manager in 2016, with a 10.5% increase to $161.6 billion, followed by State Street Global Advisors' 12.1% increase to $109.9 billion in 2016.
For the 10 largest managers of passive domestic fixed income, assets rose 8.5% to $574.6 billion in 2016, from $529.6 billion one year earlier. The Bloomberg Barclays U.S. Aggregate bond index returned 2.65% for the year.
“It was a good year for fixed income, in general,” said Dan Lomelino, director and head of North American fixed-income manager research at Willis Towers Watson PLC in Chicago.
“You had the desire from corporate (defined benefit) plans to derisk, and inflows from there into the institutional fixed-income space. In (defined contribution), we can talk about interest in core, core-plus and unconstrained. And there have been asset flows into U.S. fixed income from international investors,” Mr. Lomelino said.
In terms of sector performance, he said high-yield fixed income notably outperformed during the later months of 2016 as commodities markets recovered from previous quarters of stress.
“You had a minicycle for the oil and energy names. After February, the higher-beta, more risky names performed really well,” Mr. Lomelino said.
Assets managed in high-yield securities rose 1.8% in 2016 to $173.8 billion and the Credit Suisse High Yield index returned 18.39% for the year ended Dec. 31.