Navigating Fixed-Income Uncertainties with Active Management
Unsettling Market and Active Fund Edge
Amid the uncertainty surrounding the Federal Reserve’s future interest rate plans, an active approach to fixed-income investing is gaining traction. Active fund managers have the advantage of adjusting their investments to capitalize on rate fluctuations.
“When inflation is high and the yield curve is flat or inverted, it’s particularly favorable for active management,” explains Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock. “The Bloomberg Aggregate Bond Index, which is widely tracked, heavily invests in long duration bonds. With higher interest rates, these bonds may experience significant price swings.”
Unconstrained Funds: Freedom to Innovate
Unconstrained bond funds, like BlackRock’s Strategic Income Opportunities Fund (BSIIX), allow managers to venture beyond traditional fixed-income classes into foreign debt, bank loans, and other yield-generating assets. This flexibility enables them to mitigate interest rate volatility.
“During the 2022 round of rate hikes, unconstrained bond funds outperformed traditional bond funds,” notes Eric Jacobson, Director of Manager Research of U.S. Fixed-Income Strategies at Morningstar.
Core and Core-Plus Strategies: Diversification and Growth
Core and core-plus active strategies blend corporate bonds, government issues, and securitized debt. However, core-plus strategies offer managers the leeway to incorporate high-yield bonds and emerging markets debt.
“Core-plus active strategies are a good starting point if you’re exploring beyond the comfort zone of cash and want to capitalize on higher-quality investments,” advises John Croke, Head of Active Fixed-Income Product Management at Vanguard.
Choosing the Right Strategy
When selecting an active bond fund, investors should consider its specific role within their portfolio. “Think about whether you need it to offset stock risk or boost returns,” suggests Jacobson. “Bond funds provide stability and balance, not necessarily outsized gains.”
Additionally, investors should research the fund manager’s methodology. “The prospectus will provide insights into the fund’s mandate and strategy,” advises Jaime Quinones, a Certified Financial Planner at Stockade Wealth Management.
Tax Considerations
Actively managed funds typically face higher fees than passive funds. Additionally, funds with high turnover may lead to capital gains and losses within the portfolio, potentially resulting in tax consequences. Therefore, these funds are often better suited for tax-advantaged accounts such as IRAs.
Conclusion
In uncertain market conditions, active bond funds offer investors a dynamic way to navigate interest rate fluctuations and seek steady returns. By understanding the different types of fixed-income strategies and their benefits, investors can make informed decisions to enhance their portfolio resilience.
Data sourced from: cnbc.com
