Majority of Fixed-Income Managers Have Struggled to Outperform

Many fixed-income managers have struggled to produce market-beating gains this year from their bets in government and corporate debt.

The majority of active fixed-income managers lagged their benchmarks in the year through June, according to a research report Wednesday from S&P Global. Global income was the sole exception, with 44 percent of funds failing to beat their benchmark.

Managers of loan and government long funds struggled the most. All such funds tracked by S&P failed to outperform over the same period, the report shows. That’s a “stark contrast” to 2018, when underperformance plagued just 17 percent of government long funds and 57 percent of loan participation funds, S&P said.

Difficult times may still be ahead for fixed-income managers. S&P pointed to concerns about the outlook for the U.S. economy, as well as a yield curve inversion involving 3-month Treasury bills and 10-year Treasury bonds in March — an event last seen in 2007.

Meanwhile, UBS Group is cautioning about President Donald Trump’s wish for negative rates. In a November 12 speech to the Economic Club of New York, Trump said negative rates “gave other countries a competitive advantage over the U.S., complaining that ‘our Federal Reserve doesn't let us do it,’” Mark Haefele, CIO of UBS’s global wealth management business, said in a research note Wednesday.

“But we believe the rewards from negative rates have so far been relatively modest, while the downside is increasingly evident,” Haefele wrote. “Negative rates can be harmful to the financial system, with commercial banks forced to pay to park assets with the central bank.”

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According to S&P, U.S. government long funds gained an average 6.25 percent in the 12 months through June, trailing the 12.28 percent return of their benchmark. More than 90 percent of other U.S. government debt funds, as well as investment-grade long funds, also trailed their benchmarks over the same period, the S&P report shows.

Actively managed funds that invest in junk debt struggled as well, with about 83 percent of high-yield funds underperforming. They returned an average 5.59 percent for the year through June, trailing the 7.48 percent gain posted by the benchmark index for U.S. corporate high-yield debt.

Still, their performance was better than loan fund managers, who posted an average 2.29 percent return over the 12-month period. That compares with a 4.2 percent gain posted by their benchmark leveraged loan index.