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  2. SPECIAL REPORT
July 22, 2019 12:00 AM

Fixed income sees a good year; passive gain ‘unusual'

Robert Steyer
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    Ross Bremen
    Shelly Harrison
    Ross Bremen said political turmoil and interest rate increases nudged investors to seek more safety.

    Compared to equities, fixed income produced a good year for defined contribution asset managers in 2018, according to the Pensions & Investments annual survey of managers.

    Actively managed domestic fixed-income assets rose 1.4% to $1.07 trillion over the year, while passively managed assets gained 4.6% to $372.8 billion.

    The attractiveness of passive fixed income vs. active fixed income "was a little unusual" last year, said Ross Bremen, partner at investment consultant NEPC LLC, Boston. "Over the long term, it is not necessarily the case."

    Last year, "a lot of turmoil" relating to trade wars and interest rate increases by the Federal Reserve contributed to bond investors' desire for more safety, he said. There were four quarter-point increases by The Fed to the benchmark funds rate last year. "Passive investments replicating the Barclays Aggregate are dominated by safer government-backed securities," Mr. Bremen said. "Passive managers that replicate the Barclays Aggregate did better than a lot of active managers in 2018."

    Despite claims by active managers that they can squeeze more yield out of fixed income than index managers can, passively managed domestic fixed-income assets have grown faster than active domestic fixed income over the last five years, albeit from a much lower asset base.

    For the five years ended Dec. 31, passive fixed-income asset growth was 83.7% vs. a 7.8% gain for actively managed assets.

    "We see sponsors offering passive (fixed income) to diversify their array of strategies," said Jeri Savage, principal and head of DC research at Rocaton Investment Advisors LLC, Norwalk, Conn. "They are offering more building blocks."

    For Fidelity Investments, Boston, active domestic fixed-income assets declined 17.2% to $82.6 billion last year vs. $99.7 billion in 2017 while passive domestic fixed-income assets rose 64.8% to $36.3 billion. Fidelity ranks fourth in both categories.

    "This is part of an overall trend by sponsors to move to passive from active, though the majority of fixed-income assets remain actively managed," said Christopher Herman, Fidelity's head of investment strategists.

    Vanguard Group Inc., Malvern, Pa., the leader among passive domestic fixed-income managers, produced greater asset growth than the industry as a whole — rising 8.35% to $192.8 billion in 2018.

    Vanguard's improvement was aided by strong growth in target-date fund assets, said James Martielli, head of defined contribution advisory services. Vanguard has more than double the domestic fixed-income assets of its nearest competitor, BlackRock Inc., New York, which reported $70.1 billion last year vs. $68 billion in 2017.

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