Investors in several bond sectors might have been better off investing in an index tracker over 2015 as a number of these products have managed to outperform their active rivals over the past year, according to research by FE Trustnet.
The past year has been marked by increased volatility, with bonds selling off strongly with equities at times. Uncertainty over the timing of interest rate rises from the Federal Reserve and the Bank of England also created conditions that active fixed income managers have seemingly found difficult to navigate.
However, the same is not true of a number of equity sectors – especially those focused on the UK and close-to-home markets like Europe – as active funds have tended to triumph over passives in the turbulent conditions of the year so far.
It’s considered a truism that active management is a bit of a hit-and-miss affair when it comes to efficient, well-researched markets like the US but our data suggests that some clear winners and losers can be seen this year. It must be kept in mind that this is a short time frame and past performance is no indication of future returns.
Within the IA Global Bond sector, there are six index trackers. Two of these – Vanguard Global Bond Index Hedged and Vanguard Global Short Term Bond Index Hedged – sit in the peer group’s top quartile while the other four are in its second quartile.
Performance of funds vs sector over 2015
Source: FE Analytics
As the graph above shows, global bonds were badly hit by the strong sell-off that struck most assets at the end of April. While Vanguard’s short-term bond tracker was barely touched by the turmoil and Vanguard Global Bond Index Hedged has bounced back relatively well, the average active fund has struggled to regain lost ground and is still sat on a loss.
That’s not to say investors couldn’t have done better than a passive approach to global bonds and that’s true of all the sectors mentioned in this article.
FE Analytics shows that the five FE Crown-rated New Capital Wealthy Nations Bond has been the best performer with a 6.70 per cent gain while three other funds – Pioneer SICAV Emerging Markets Bond, GAM Star Credit Opportunities and GS Liberty Harbor Opportunistic Corporate Bond Portfolio – have made more than 5 per cent.
When it comes to the IA UK Gilts sector the fourth, fifth and sixth spots for the year to date are taken up by trackers: Vanguard UK Long Duration Gilt Index, Scottish Widows UK Fixed Interest Tracker and Vanguard UK Government Bond Index respectively.
Only Newton Long Gilt, Schroder Institutional Long Dated Sterling Bond and F&C Institutional Retirement Annuity have made higher returns over the time in question.
The IA Mixed Investment 0%-35% Shares and IA Global Emerging Market Bond sectors only have one member each taking a passive approach, but both of these funds are in the top quartile. In fact, L&G Emerging Markets Government Bond (US$) Index is the second highest returning in its peer group after making 5.06 per cent during a time when its average rival made a loss of a similar magnitude.
Performance of fund vs sector over 2015
Source: FE Analytics
Another sector where the passive members have outperformed is IA Sterling Corporate Bond, where there are six index trackers. Three of these - Vanguard UK Investment Grade Bond Index, L&G Sterling Corporate Bond Index and BlackRock Corporate Bond 1 to 10 Year – sit in the sector’s first quartile; another two are in the second quartile and only one is in the third.
However, Equilibrium Asset Management investment manager Mike Deverell told us earlier in the year that investors should be wary of using a passive approach when it comes to corporate bonds.
“A gilt or US treasury tracker is fine, as long as you know what you’re getting in terms of duration or average maturity –whether you’re buying short or long maturity, or an all-stocks fund,” he said.
“However, the way ‘market cap’ weighted corporate bond trackers are constructed is something investors should be aware of. You effectively allocate the most to the company that has the most bonds in issue. To put it another way, you are lending most to the company with the most debt.”
However, when it comes to equities it seems that tracker funds have failed to rise into the top quartiles in a number of sectors.
One of these is IA Europe ex UK, where seven of the eight index tracking members are in the bottom quartile. Vanguard FTSE Developed Europe ex UK Equity Index is the one to have achieved a third quartile ranking.
Europe has proved to be fertile hunting ground for active managers, as the uncertainty created by the Greek debt crisis and the stimulus provided by the European Central Bank created opportunities to avoid the worst-hit countries and sectors while buying those that looked most promising. The average IA Europe ex UK fund is up 7.96 per cent, against a rise of just 3.56 per cent in the MSCI Europe ex UK index.
It’s a similar story with when it comes to UK equities. Over 2015, the FTSE All Share is down 0.77 per cent but the average IA UK All Companies fund has returned 3.60 per cent and the gain in the IA UK Equity Income sector has been 4.91 per cent.
Performance of sectors vs index over 2015
Source: FE Analytics
Concerns such as the general election, the risk that Greece could leave the eurozone and plunging commodity prices hit large parts of the index. Trackers – which their structurally high weighting to mining and energy stocks – have struggled while active managers have been able to side-step these areas.
Out of 38 index trackers in the IA UK All Companies, 22 are in the bottom quartile over the year to date while another 13 are in the third quartile.
This means that three are in the first quartile. Two of these – HSBC FTSE 250 Index and BlackRock Mid Cap UK Equity Tracker – follow the mid-cap index, which has been insulated from many of the international concerns thanks to the domestic-facing nature of its constituents while L&G Ethical naturally avoids troubled areas of the market like miners and oil & gas stocks.
The other areas where trackers have underperformed active funds are Asian and emerging market equities, where the index has been battered by worries over China’s slowing growth and falling commodity prices.
In the IA Asia Pacific Excluding Japan sector, two of the seven trackers are in the bottom quartile while the remaining five are in the third. In IA Global Emerging Markets, one tracker has made it into the second quartile but three are in the third and two are in the bottom quartile.