When it comes to bond funds, says a recent article in The Wall Street Journal, “bargain shopping may not be the best idea.”
Higher-priced portfolios assembled by active money managers, it reports, are “handily beating the cheaper index-tracking competition, largely because they are doing a better job protecting their portfolios from rising interest rates.” Citing Morningstar data, the article notes that 70% of fund managers who choose intermediate-term bonds are outperforming their passive peers, adding, “only 36% of U.S. stock pickers can make the same boast.”
This is an interesting trend, particularly in a rising-interest-rate environment—rising rates chip away at the value of existing bonds since newly issued ones offer higher payouts to investors. The article quotes Richard Bernstein Advisors portfolio strategist Dan Suzuki: “We’ve been saying for a while that the biggest risk in portfolios isn’t equity volatility but rising risks for bonds.”
Active portfolio managers, the article says, have been “steadily shifting toward short-term debt, which is less vulnerable to losses from rising rates and inflation.”
The concern for the mom-and-pop investors that have “gobbled up passive funds in recent years,” is that they may not realize that the bonds they considered a safe-haven are vulnerable to rising rates, and seeing declines across all assets classes might trigger nerves and lead to panicked selling.