Morningstar, America, Barclays discussed on Capital Ideas Investing Podcast


You look to the portion of your fixed income portfolio, and you're grateful that, that helped provide some balance in the balance that you need in that fourth folio, the bond fund of America is now the largest active fund in the MorningStar intermediate co bond category. Many of the largest funds in that category are passive. Is that a good thing or a bad thing that were in the company of so many pacifists? And many of the large active fixed income funds on the Core, Plus category. Well for us and for clients. It's a very good thing. And when you look at our results relative to passive, they're very strong. So it's an important note for advisors and clients that core does not equal passive and passive has a hard time replicating the benchmark in fixed income. It's very different than equities. So being the largest active manager in a category that has a lot of passive for capital group. We thinks an excellent thing and also for bond fund of America fundholders. We think that's a win win. Why are so many of the active funds in the cool plaster? Why have they focused on delivering the higher return with the risk profile? So what happened over the last decade since the financial crisis is a lot of these funds in this intermediate category were more core to begin with. And when we got two zero interest rate environment, they started to move out on the risk spectrum. So over the last decade, you've seen an increasing use of high yield for a lot of core strategies, effectively, making them Core, Plus strategies and they've been rewarded for doing that. So that's continued at more of a rapid pace in the last. Three to five years. So that category split now tells you the core. Plus category is more than likely going to have a lot higher high yield than you probably need in your core portion of your fixing comport folio. It's a meaningful split of the category. And it's because so many funds in that category were reaching for yield over the last decade. Unload, what would you add to that MorningStar did is a reflection of being mindful of the risks that are embedded in a balanced portfolio? But it's also reflection of where the market is already been moving investors voted with their money that they want a conservative option to protect their wealth and diversify their portfolio money has been moving from the Core, Plus category to the core category for several years. And as they've been doing this, you can see that it's really been part of the movement, from active to passive investors have been saying they want to conservative option that will help balance the Rhys in their portfolio and. Tech their wealth as Mike said there aren't many active options in the course base the reason is because it's actually difficult to have an active product that will satisfy all four roles of fixed income. What I what I would add to that is, there are many reasons why passive does not equal the benchmark. And again, when we say, does not equal it doesn't just simply lose by the explicit fee. It loses by more, there's an over the counter market, that we trade in the bond market, or fixed income, and that creates greater volatility of the underlying security. There's ten thousand securities that are in the Barclays aggregate index. Some don't trade on a given day and there's also turnover of that index every single year. So heightened turnover less volatility the ability to replicate, the benchmark means that passive loses to that benchmark by more than Justice explicit fee, the bond from America's is the largest act fund in the MorningStar intermediate Corban category. And this is a big advantage for us, because when we're looking at the other funds in the space, a majority of them are passive products and will, we know is that in fixed income in particular. Later, be index is something that's designed to be beaten the fixed income indices are not like equity, indices equity indices are market value indices, where the companies that have the greatest prospects and the greatest potential have the greatest market value and they become bigger and bigger in the index. So it becomes harder and harder to beat the index as time goes on, and the fixed income side. It's different it's an issuance based index and what that means is that as companies start levering up their balance sheet issuing debt to lever up they become bigger and bigger in the index..

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