F I N A N C E
TheFutureofBondManagers
22
Edited by
Pat Regnier○ Like stockpickers before
them, bond fund stars will
face tougher competition
from indexesInvestors are fleeing actively managed stock funds in
favor of index funds. Active bond funds may be next.
Academics have understood for decades that
stockpickers are unlikely to beat their bench-
mark indexes after fees, but investors’ reaction
was delayed. They kept handing equity manag-
ers money. From 1993 to 2007, actively managed
stock mutual funds boasted net inflows every year
except one, according to Morningstar Inc.’s earli-
est available numbers.
There were three notable reasons why investors
stuck with stockpickers as long as they did. First,
the best-known index funds merely tracked the
broad market—so investors who wanted exposure
to specific styles of stockpicking, such as focusing
on hard-luck “value” companies or smaller firms,
were drawn to active funds. Second, the mutual
fund industry persuaded many investors that stock-
pickers would better protect their money during
downturns than index funds. Third, and perhaps
most consequentially, the industry promoted star
managers such as Peter Lynch and Jeffrey Vinik ofFidelity Magellan, Bill Miller of Legg Mason Value
Trust, and John Neff of Vanguard Windsor. The
message was unmistakable: Successful investing
came down to hiring hotshot managers.
Then the 2008 financial crisis seemed to change
everything. Stockpickers, including some of the
brightest lights, suffered as badly as index funds
or worse. The stage was set for a revolution, and
investors revolted. They’ve pulled $1.5 trillion from
actively managed stock funds since 2008 through
July while putting $2.7 trillion in index funds. For
the first time ever, there’s more money invested in
U.S. stock index funds than actively managed ones,
after accounting for estimated fund flows in August.
Meanwhile, active bond managers have contin-
ued to prosper. Investors have put roughly $160 bil-
lion more into actively managed bond funds than
into bond index funds since 2008. As of July, active
bond managers oversaw $2.2 trillion more than
bond index funds did. It’s not as if active bond man-
agers stand a better chance of beating their bench-
marks than stockpickers. S&P Dow Jones Indices
tracks the performance of active managers in its
biannual Spiva U.S. Scorecard, and the results are
never flattering. The most recent report shows yet
again that the overwhelming majority of bond man-
agers failed to keep up with their benchmarks over
periods of five years or longer.
So why are investors clinging to active bond
managers even as they dump stockpickers? The PHOTO ILLUSTRATION BY 731. PHOTOS: GETTY IMAGES (2). ALAMY (1). DATA: MORNINGSTARBloomberg Businessweek Septe er30, 2019