The Pimco researchers said differences between bond and stocks could be due to the large proportion of non-economic bond investors, the frequency of benchmark rebalancing, structural tilts in fixed income or the wide range of financial derivatives available to active bond managers.
However, State Street Global Advisers recently claimed there were very few ETF providers capable of tracking bond markets in a quality way.
The Pimco authors conclude that while passive management “has its virtues” by allowing easy access to markets, ultimately “neither passive nor active investors can dominate at equilibrium”.
“In a world where every asset manager is passive, the asset management mandate is to replicate the market. Therefore, all assets get absorbed without due consideration of their characteristics,” the report said.
“Prices would cease to be informative the day assets got bought without being analysed,” and, the report added, would lead to misallocation of capital, a market crash and a collapse in confidence.
Active management of funds was necessary, the report argued, and played an important role in the economy by helping to allocate capital efficiently.
