Personal Finance: In Stocks or Bonds Active Management Is Ill-Advised

Personal Finance: In Stocks or Bonds Active Management Is Ill-AdvisedIn our last blog post, we shared the timeless principles we suggest for your fixed income investing, including avoiding active management strategies aimed at predicting future prices or jumping on popular trends. We’ve already presented a Vanguard Funds report demonstrating that actively managed stock funds face punishing odds in their quest to outperform appropriate market benchmarks. But what about in the bond markets, especially in the current climate of potentially rising interest rates? Can active management shine? An additional report from Vanguard helps us understand why investors are still better served by patient, passively managed participation in bond and stock markets alike.

In September, Vanguard published an additional personal finance report, “Rising rates shine a dull light on active bond funds.” In stock markets, active managers seek to predict stock or sector price movements based on factors ranging from logical (dividends, earnings, etc.) to laughable (who won the Super Bowl). In bond markets, active managers often seek to outperform their benchmarks by successfully predicting near-term changes in interest rates. That’s because, as interest rates rise, bond prices usually – but not always – fall.

Which brings us to today’s climate of potentially rising rates, and those who propose that active managers have particularly good opportunities to outperform in the current environment. As Vanguard’s report proposes: “Given that active managers have the tools and expertise in their arsenal to maneuver portfolios in anticipation of a rise in interest rates, shouldn’t they have an advantage?”

Upon analysis, the answer seems to yet again be, not so much.

    • Vanguard looked at the rising-rate period June 2012–August 2013 and found that 81% of active bond managers underperformed their benchmarks during this period.


    • They also looked at a subset capturing the most recent interest rate surge from May 2013–August 2013, and found 70% of active bond managers underperformed.


    • Assessing the rising-rate period October 7, 2010 – February 8, 2011, active managers fared better, with 61 percent outperforming their benchmarks. But the median excess return was a shaky 0.30%, with the majority going on to underperform in the subsequent 3-month, 6-month and 12-month periods. The results were essentially a wash.


  • Vanguard further notes: “In prior research, we looked at seven rising-rate periods since 1981, and the majority of active bond funds, on average, historically failed to outperform their benchmarks.”


Thus, particularly after considering the costs involved, we see little evidence that actively managed bond funds are expected to consistently outperform our recommended approach. We continue to help SAGE investors build a low-cost, globally well-diversified portfolio of passively managed funds based on personal goals and risk tolerances … and leave the prognosticating to your local neighborhood palm reader.

SAGE Serendipity: Not everything in the world stays as steadfast as our ongoing investment strategy. Here’s an irreverent look at 40 things you never get to see anymore … some of them for the best!

Sheri Iannetta Cupo, CFP®, is Founding Principal of SAGE Advisory Group, based in Morristown, NJ, an independent, Fee-Only Registered Investment Advisory firm, specializing in providing busy professionals and their families with holistic financial life planning and investment management services. You can find more here: where this post originally appeared. You can also connect with Sheri on Twitter, Google+ and LinkedIn.

Looking for more articles on Personal Finance? Try these on Project Eve:

Personal Finance: Basic Estate Planning Documents for Adult Children

In Personal Finance Why CFP® Certification Counts

Personal Finance: In Stocks or Bonds Active Management Is Ill-Advised

Personal Finance: Never Mind Your Wallet – What’s In Your Portfolio?


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