Active or Passive

In recent months, the debate over whether to shift towards an “active” or “passive” fixed income invested strategy has reignited. This is in large part because of the overall market dynamics: steadily rising bond yields are reaching (or have already reached) peak levels, as global banks favor tighter monetary policies and global growth continues to shrink in the face of turbulent trade conflicts. Fixed income investors are bracing for increased market volatility, while others are adjusting their portfolio allocation towards other asset types. Still, where some see adversity in the market others see opportunity and there is a case to be made that a more hands-on investing strategy could be a beneficial approach during uncertain times.

Fixed income securities are generally thought to be less risky than equities in a growth market and potentially more risky in a down market.  Particularly as interest rates begin to rise (as they have), bond prices will likely begin to fall.

A “passive” fixed income investing strategy, much like with equities, focuses on longer-term, lower-cost investments in index funds that have more predictable returns.  Most retail investors fall into the category of passive fixed income investors, with bonds being added to diversify their portfolio while providing more stable income.

Active investing, as the name implies, is much more hands-on and often requires a portfolio manager with vast knowledge of the markets. Generating “alpha” as a fixed income portfolio manager is generally regarded as more risky, despite the fact that active managers regularly outperform passive benchmarks by adjusting their portfolios based on security selection, yield curve exposure and duration positioning.¹

As rising interest rates threaten to curb bond yields, many investors and portfolio managers may be considering decreasing their portfolio allocation in fixed income. Those that continue to invest in increasingly volatile markets may find they have more flexibility through an active investing strategy and can help limit potential risks through a more diverse allocation of securities.

The important thing to understand is that every portfolio is different and will require a unique approach. Weighing the benefits, potential risks and opportunities of an active or passive investing strategy requires a deeper understanding of market dynamics, which is what Oppenheimer’s Financial Advisors can provide. Our team of over 100 institutional sales and 60 trading professionals can help analyze your fixed income portfolio and offer innovative strategies to achieve your goals.