Investment Strategies

The Active Advantage for Core Bond Investors

Scott Mather, CIO U.S. core strategies, explains how an active approach in core fixed income is key to enhancing alpha potential without sacrificing downside risk protection.

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David Fisher, Head of Traditional Product Strategies: Hi, I’m here today with Scott Mather, PIMCO’s CIO for Core Fixed Income. Thanks for joining me, Scott.

Scott Mather, CIO U.S. Core Strategies: My pleasure.

David: So let’s talk a little bit about the active passive debate as it relates to core fixed income. I think that there’s one school of thought that says in core fixed income you can just go passive, have a very low cost index based solution, and then you can go active in more esoteric parts of the market. Do you think that that’s the right solution for investors, or is there still a strong argument for remaining active within the core fixed income space?

Scott: There’s a lot of differences between fixed income and the equity market or the listed market, for example.

Chart: The bar chart compares the percentage of active mutual funds and ETFs that outperformed their median passive peers after fees over a 1-year, 3-year, 5-year and 10-year period. More active bond managers outperformed their passive peers.

The drivers of our alpha, half of them roughly come from the top down ideas that we generate with respect to growth and inflation and changing monetary policy. And the other half come from just bottom up individual bond selection, the bottom up opportunities. And so, you know, while people can go passive—particularly in fixed income it’s one that we think leaves a lot of money on the table if people do that.

One of the reasons for our success through all sorts of different market environments is our ability to diversify our investment strategies to not rely too heavily on just one, for instance,

Text on screen: PIMCO's active advantage - Diverse sources of return for resiliency even in challenging markets

yield enhancement or going down in credit quality. That can work well for some periods of time, but it certainly doesn’t work well in others.

Text on screen: PIMCO's active advantage - Alpha potential is even more meaningful in a low return environment

Actively managed core bonds allows a significant amount of increase in potential return because of in a low rate environment the alpha that we generate in many cases can be a significant part of the overall return, and we think that will continue to be the case going forward.

Text on screen: Core bonds: Consistent anchor in investor's portfolio

So think about core bonds—particularly our version which tends to be a higher quality offering in that space—as sort of the anchor of the portfolio even while credit spreads are widening or we have some risk off event.

David: Great. Well, thanks for joining me today, and thanks to all of you as well.

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