Actively managed bond funds also suffer from high levels of style drift, according to S&P Dow Jones Indices. Average style consistency, the percentage of funds retaining the same style classification at both the beginning and end of a given time period, drops below 50 percent for mutual funds in most fixed income sectors over a 15-year time period.
“Investors need to look at historical allocations and return streams to make sure they’re getting something that will maintain its risk-reward profile,” says Woodworth.
Yet in many areas of fixed income, such as global bonds, high-yield, and short- and intermediate-term bonds, active managers can add diversification, risk management and selectivity to an investor’s allocation.
There may be some areas of the fixed-income market efficient enough to make passive investing worth it, Woodworth admits, and as a new generation of smart beta products proliferate into fixed income, new passive investing options may be attractive to investors.
“Smart beta is an area where you really want to make sure you know what you’re getting,” says Woodworth. “Smart beta products often require you to allocate around them, and they’re stuck tracking their index. Active managers have the ability to move away from making investments that might not be advantageous and weigh factors appropriately given the market environment. That’s not to say that factor investing isn’t good in the long term, but not all factors work all of the time.”