A Pimco strategist has issued a passionate defense of active bond management, refuting — by name — the legendary advocate of index-based investing, John Bogle.
In a piece titled
“Sorry, Mr. Bogle, But I Respectfully Disagree. Strongly,” Pimco pensions strategist James Moore offered a series of reasons why “the common wisdom” about the superiority of so-called passive investing might not extend to bonds.
It's unclear which of Mr. Bogle's pronouncements the Pimco strategist was taking issue with because Mr. Moore cited only a recent appearance “on financial television.” A Pimco spokesman did not immediately respond to a request for comment.
“The key question for investors is, 'Do I have a strong reason to believe my active managers will add value in excess of their fees',” asked Mr. Moore. “I would not argue that all do or even that a majority do, but those manager who understand and exploit the five reasons I list, plus a host of others, stand a good chance.”
While he said the “logic is fairly compelling” that active investors typically see negative returns, Mr. Moore said bonds are very different because of several reasons: For one thing, bond indexes — unlike most tracking stocks — are not organized on the basis of the market capitalization of the companies but on a factor less important to investors — the amount of the debt taken on by the companies.
The report was released as Pacific Investment Management Co. defends against investor redemptions in the aftermath of the abrupt departure of its co-founder Bill Gross to Janus Capital Group Inc. Following the
departure of Mr. Gross, the Total Return Fund (PTTAX) he managed saw $23.5 billion in outflows last month, the largest ever for the world's biggest bond fund.
The report also comes as the the Vanguard Group Inc. — whose assets are more tilted to index funds — increasingly adds market share in the bond space. Pimco
lost the title of top bond manager to Vanguard this summer.
Vanguard holds $500 billion in U.S.-registered taxable bond mutual and exchange-traded funds, compared with Pimco's $408 billion, according to Morningstar Inc.
Among Mr. Moore's other arguments:
• Unlike stocks, the market for bonds includes investors like central banks and insurance companies who value yields over capital gains, transferring value to investors without the same constraints.
• The new-issuance markets is a larger force in bonds than in stocks, meaning that taking an active role in that initial market for bonds can impact performance.
Since bonds are traded not in exchanges but in so-called “over-the-counter” transactions, factors including the size of the investor and the characteristics of the negotiation between bond traders are more important than in stocks.
Finally, because bonds can default or their owners can be forced to sell due to ratings changes, the value of defensive management matters more. So does the use of derivatives and the impact of regulatory factors in incorrectly valuing bonds, according to Mr. Moore.
In an e-mailed statement, Vanguard spokesman David Hoffman wrote the firm believes in both index investing and active management “at a reasonable price.”
“We believe the most crucial factor for investing success is cost,” he said.
