Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It’s generally been a terrible few years for humans who pick bonds for a living.

Clients both big and small have sent them a sobering message that they're usually not worth the money they're paid. Investors have yanked billions of dollars from active, higher-fee strategies, or those guided by human decision-making, while pouring cash into cheaper funds designed to mirror indexes.

Ditching Human Decisions
Investors have broadly favored passive funds over active ones in the past year
Source: Morningstar
Data is through June 30

A Bloomberg article on Tuesday highlighted just how far this trend has gone. Pensions are increasingly abandoning hedge funds and other more expensive strategies, sometimes in favor of index funds.

But suddenly, as global bond markets reel in the wake of Donald Trump's election as U.S. president, managers of active bond funds are soundly beating broad benchmarks.

Actively managed intermediate bond funds have lost an average 1.8 percent in the past month, compared with a 3.2 percent loss on the Bloomberg Barclays Global Aggregate Index. A similar trend can be found among high-yield bond and non-traditional debt funds, which have also done significantly better than benchmarks.

Beating the Index
Active debt fund managers have generally done better than broader benchmark indexes recently
Source: Morningstar, Bloomberg, S&P LSTA index data

Perhaps this is just a fluke. More likely, though, the market has reached a tipping point at which human bond-picking abilities will start to demonstrate more reliable value.

Even Vanguard, the investment firm that has fueled the seismic shift away from actively managed funds, entertains this possibility. Last month, Vanguard CEO Bill McNabb said on Bloomberg Radio that he sees more potential for bond fund managers to outperform going forward.

Why has the landscape changed? First of all, the Federal Reserve was the main driver behind the broad-based gains in bonds. Central bank policies fueled a powerful rally in all types of debt, and the bigger and broader the exposure for investors, the better they are likely to do. That's over for now.

The Fed is expected to raise interest rates again next month, which almost doesn't matter anymore now that President-elect Trump is stoking inflation expectations. Analysts widely expect Trump's administration to unleash a giant infrastructure spending plan, and that has ignited a historic sell-off in U.S. bonds.

That's not to say that investors predicted Trump would win, nor that they foresaw the market reaction. Quite the opposite. But many had squirreled away larger-than-average amounts of cash and were focusing just on specific companies. Some avoided big-name bonds that are mainstays of the biggest ETFs. They were unsure of the future, and that skepticism worked in their favor.

Central banks are increasingly losing control over the world's huge debt market. The result is more dispersion among bonds that win -- or lose -- big. There also may be some forced selling that offers good opportunities for those able to recognize them. Going forward, it's likely that human decision-making in debt will be able to prove its value more consistently.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net