“Because of the low yields, it’s not worth investing in an active manager in the euro government bond space,” says Libano.
High yield, low outperformance
Recent performance of active managers in high-yield bonds and emerging market local currency debt suggests passives have the edge. According to Financial Express data, US high yield funds have underperformed the index by more than a third over the past five years.
But Libano sticks with active managers nevertheless. “It’s extremely hard to find good active managers in this asset class. You can really only find them in the first two deciles, but US high-yield is a small off-benchmark position for us, which we prefer to fill with an active manager.”
Nomura US high yield vs index vs peer group
The fund he has picked is the Nomura US High Yield Bond Fund, one of very few funds that have outperformed the index on a five-year basis. But if Libano had been a US investor with a larger allocation to the asset class, he would arguably be forced into taking a sizeable ETF exposure.
Overall, the Portuguese fund selector believes passives will continue to gain market share, but progress will be uneven.
“Index trackers will remain more prevalent in efficient markets such as US equities than for example in emerging markets or small caps, I believe. Less efficient markets are the ones where active managers will continue to prevail.”
