Market Disruption Provides Opportunity for Active Fixed-Income Managers to Prove Value Over Passive Strategies
July 29, 2020 — Boston
This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of June 2020. This issue also explores how institutional asset managers are adjusting to travel restrictions amid the COVID-19 outbreak. The Special Coverage article discusses the performance dispersion in core bond portfolios.
Highlights from this research:
- June was a strong month for mutual funds as the vehicle's assets climbed over $15.5 trillion, increasing 2.3%. Net flows were also positive at $12.3 billion. However, net flows 2020 YTD are still severely negative ($303.1 billion). ETF assets climbed 3.1% in June to end the first half of 2020 at $4.38 trillion. ETFs are now down just 0.6% from the year-end 2019 and 1.7% from highs near the end of January 2020. ETF flows totaled $57.2 billion in June.
- The institutional sales process typically relies heavily on in-person meetings. When travel restrictions due to the outbreak of COVID-19 were put into place, the institutional sales process moved much slower and the volume of communication desired by institutions increased. While demand for multi-asset-class solutions such as outsourced chief investment officer (OCIO) model and liability-driven investing (LDI) was increasing prior to 2020, the market downturn has likely accelerated the adoption rate, because a majority of request for proposal (RFP) professionals believe RFP volume for those strategies will increase over the next three years.
- There has been a wide dispersion in fixed-income manager performance. While this would be expected in higher-risk asset classes such as equities or alternatives, or even higher-risk strategies in fixed income, including emerging markets debt, core fixed-income portfolios are meant to be diversified and less susceptible to market volatility. Market disruptions like COVID-19 create an opportunity for active managers to prove their value over passive strategies. Furthermore, they provide an opportunity for active managers to prove their value over each other. With performance dispersion levels not seen since 2008–2009, the door may open for fixed-income managers in insurance general account portfolios.