The Bloomberg Aggregate Bond Index has a risk profile that makes investors think twice about their exposure to fixed income securities. Agg now yields less than 1.5% and has a duration of around 6.5 years.
The combination of low yield, long duration and concerns about rising inflation has encouraged investors to pour $ 330 billion into active bond funds this year through September, according to data from MorningstarDirect . That’s over $ 100 billion more than the $ 215 billion they invested in passive bond funds.
The idea or hope is that active managers can find assets with more return and less duration.
Among active funds, nine of the top 10 Morningstar categories for entries are fixed income categories. Short-term bonds, core plus intermediate bonds and bank loans lead the way with inflows of $ 56 billion, $ 41 billion and $ 33 billion, respectively.
Top 10 active fund categories for flows
The $ 33 billion in collection from the bank loan category represents about a third of its total assets. And the $ 32 billion collected in the Multisectoral category represents around 10% of its total assets.
Funds in mind
The active fund with the most fundraising is Pimco Income (PIMIX), which took in $ 10.2 billion this year. Managed by Dan Ivascyn (since March 30, 2007), Alfred Murata (since March 15, 2013) and Joshua Anderson (since July 30, 2018), the $ 145 billion giant is characterized by Morningstar as a multi-sector fund.
The composition of the fund’s portfolio indicates why investors find it attractive. Over 40% of the fund’s assets are comprised of non-agency mortgage-backed securities and emerging market debt securities. These fixed income sectors are not part of the AGG. According to the fund’s most recent fact sheet, its 30-day SEC yield is 2.1%.
In some ways, Pimco Income has become the star child of actively managed investors to generate returns over the past decade. In the process, it became the fund’s flagship product, replacing its less aggressive sibling, the $ 72 billion Pimco Total Return (PTTRX) fund. Pimco Income had less than $ 20 billion in assets ten years ago and about $ 65 billion at the end of September 2016. More than $ 100 billion in fund assets come from institutions, according to Morningstar.
Investors didn’t always trade the fund well, withdrawing more than $ 10 billion in March 2020 when stocks and non-government bonds fell as the world froze. Its 4.2% standard deviation of returns over the last decade to October made it more volatile than the 3% standard deviation of Agg
But the fund itself delivered the goods, posting an annualized return of 6.98% for the decade, beating Agg’s nearly 3% annualized return by 4 percentage points over the same period.
After Pimco Income, American Funds American Balanced (ABALX), then a non-traditional bond fund, the $ 45 billion BlackRock Strategic Income Opportunities (BSIIX) fund is on the list of the largest inflows. The BlackRock fund collected $ 8.5 billion over the year, or 20% of its total assets.
Rick Rieder (since August 6, 2010), Bob Miller (since October 17, 2011) and David Rogal (since April 28, 2017) drove the fund back 1.1% for the year through October. This is average for the category, but well before the loss of nearly 0.5% for the Agg.
Over the longer term, the fund has been more impressive, achieving an annualized return of 3.96% for the decade through October and exceeding the Agg by around 1 percentage point per year.
The fund has been more volatile than the index, but not as volatile as the Pimco fund. It posted a standard deviation of returns of 3.29% for the decade against the standard deviation of 4.2% of Pimco and the 3.01% of the benchmark. But because its returns have been lower than Pimco Income, its Sharpe ratio is less than 1.03 versus 1.49 for Pimco.
The fund has a low duration of 1.69 years, but a 30-day SEC yield of 2.2%. About a quarter of the portfolio is made up of bonds rated below investment grade and 11.4% of bonds rated BBB, the lowest level of investment grade.