“Fixed Income: Why Progress Is Not Following the Herd” explores the difference between Emerging Managers and their large counterparts and, more importantly, why this should matter to institutional investors. In summary, the paper examines the following:
- Passive management has taken the lion’s share of equity asset flows recently as it has become accepted knowledge (despite some evidence to the contrary) that active equity managers struggle to beat their benchmarks. Yet this is not the case in core U.S. fixed income. Why is this?
- As an asset class, core fixed income is dominated by the five largest managers who manage a combined 65% of institutional and retail assets. Their very size, however, requires increasingly sophisticated, perhaps even opaque, use of derivatives to implement product strategies without moving markets. Managers with smaller product assets can take advantage of issue and issuer opportunities that larger firms struggle to access.
- Firms with large core fixed income product assets often employ deep teams of analysts, portfolio managers and traders in an attempt to outperform the benchmark. The results of this approach—sending an army into the fray—have been less than expected as performance has not been commensurate with team size.
- Progress approaches core fixed income differently. Rather than use derivatives or large teams to maximize alpha versus the index, we allocate product assets across multiple emerging fixed income managers. This allows Progress to take advantage of each manager’s proven skill in fixed income security valuation, duration management, sector analysis, and structure research. Our track record demonstrates an ability to harvest alpha from the underlying managers while minimizing overall portfolio risk through diversification.