Morningstar - Q3 2020 - 25

Few managers have maintained a material
long-duration view, and the higher-conviction
short-leaning approaches have generally proved
unfavorable.
This arguably supports the case for low-cost,
passive options. Critics of passive fixed-income
management cite the danger of the most
indebted issuers being the biggest exposures in
traditional cap-weighted bond indexes,
compounded by the growth of negatively yielding
debt. These are valid concerns. But active
managers as a whole haven't beaten bond indexes
in either absolute or risk-adjusted terms.
Two key points should not be overlooked in
assessing the merits of a passive fixed-interest
allocation. For one, broad-based indexes
will usually have a large structural allocation to
sovereign- and government-related bonds-

it's almost 90% for the Bloomberg Australian
Composite Bond Index and more than 60%
for the Barclays Global Aggregate Bond Index-
and we've repeatedly seen markets flock
to the perceived safe haven of liquid high-grade
sovereign bonds during times of stress.
Meanwhile, index funds have a head start over
their active cohort through their lower fees,
a point we've highlighted in this era of historically
low interest rates.

leaning managers were seeking to lower their
overall risk and susceptibility to capital loss
if yields rose. Losses in a defensive allocation are
often a no-go for investors and their advisors.
This isn't an excuse for active managers, who are
of course employed to deliver a superior return
to the market or meet a performance objective.
But it is a salient reminder that markets are
unpredictable. Investors considering funds that
swing hard should be conscious of the potential
for big misses and to size these exposures in
their portfolio appropriately.

We don't think this signals the death knell for
active-duration management in bonds,
however. Duration is just one of several levers
bond managers can employ, and even a lot of
portfolios positioned relatively short will
still run with some baseline level of interest-rate
risk that supplies a degree of ballast when
equity markets become fearful. It's also worth
remembering that aggressively short-duration-

Tim Wong, CFA, is director, manager research, with
Morningstar Australia.

TRENDS

Tracking the Coronavirus Crash
WWI and Influenza (06/1911-12/1924)
2nd Part of Great Depression,
WWII (02/1937-02/1945)
Coronavirus (through 06/30/2020)

Crash of 1929, 1st Part of
Great Depression (08/1929-11/1936)
Lost Decade (08/2000-05/2013)
Inflation and Vietnam (12/1972-06/1983)

Change
Since Peak
10%
0
-10
-20
-30

0
1
2
Duration (Years)

13 YEARS, 6 MONTHS

12 YEARS, 9 MONTHS

8 YEARS

10 YEARS, 6 MONTHS

-40
7 YEARS, 3 MONTHS

Nicolas Owens is Morningstar's editor-in-chief.

Peak-to-Recovery U.S. Real Returns in Five Most Severe Bear Markets and the Coronavirus Crash

6 MONTHS

Using inflation-adjusted monthly U.S. stock
market returns, the exhibit at right places
the coronavirus stock sell-off in the context of the
five most severe bear markets of the past 150
years, lined up together to show their duration
in months from their peak to when the
market returned to the same value. In terms of
steepness, this year's initial decline (22.5%
between March 9 and March 23) was serious-
it roughly matched the initial sell-off during
the crash of 1929. The other most severe episodes
include the inflationary bear market during
Vietnam/Watergate, the second half of the
Great Depression/World War II, the Lost Decade,
and the World War I/influenza pandemic
downturn. With the market's recent rebound, this
pandemic is following the same path as the
influenza pandemic 100 years ago. Through June
30, the market was down 2.9% from its peak.

-50
-60
-70
-80

Sources: Kaplan et al. (2009); Ibbotson (2020); Morningstar Direct; Goetzmann, Ibbotson, and Peng (2000); Pierce (1982);
www.econ.yale.edu/~shiller/data.htm. Data as of 06/30/2020.

http://www.econ.yale.edu/~shiller/data.htm

Morningstar - Q3 2020

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