Within fixed-income mutual funds in U.S. defined contribution plans, passive offerings have gained significant share and now make up more than a quarter of assets. Passive funds clearly have the lowest expense ratios, but would active investment options better help participants achieve their retirement objectives?
Two behemoths: Both Vanguard and Fidelity have seen large increases in assets allocated to passive fixed-income strategies over the past 20 years. Total assets in the firms’ most popular passive fixed-income mutual funds have soared to $71.2 billion from $1.4 billion in 1997.
Asset growth (billions)
A better option: Active funds, net of fees, have provided both superior returns and lower risk. The largest active funds in DC plans sailed through the COVID-19 market turmoil; all but two had a smaller drawdown than a typical passive strategy. Every fund had higher returns over the past 10 years, with an average outperformance of 73 basis points, net of fees.
10-year return and most recent drawdown relative to asset size
Reliance on Treasuries: The largest index strategies track the Bloomberg Barclays U.S. Aggregate Float Adjusted index, which has become a concentrated bet on the U.S. government. More than 60% of the holdings of the largest passive funds are either U.S. Treasuries or agency mortgage-backed securities.
Holdings of the largest mutual funds
|Fund||Treasuries||Corporate||Mortgages*||Cash & other||Municipal, other funds/not covered|
|Vanguard Total Bond Market Index-Institutional||44.2%||31.4%||23.9%||-0.2%||0.7%|
|PIMCO Total Return||19.5%||30.4%||41.4%||7.1%||1.5%|
|Dodge & Cox Income||9.0%||40.3%||41.4%||6.6%||2.7%|
|Western Asset Core-plus Bond||31.2%||40.1%||29.1%||-0.5%||0.1%|
|Fidelity Total Bond||28.8%||28.4%||7.4%||34.8%||0.6%|
|Federated Hermes Tot. Ret. Bond||14.5%||35.5%||1.3%||36.1%||12.5%|
|American Funds Bond Fund Amer.||35.2%||25.9%||28.1%||8.9%||1.8%|
|Western Asset Core Bond||25.9%||36.1%||37.9%||0.0%||0.1%|
|J.P. Morgan Core Bond||20.1%||31.1%||38.5%||9.9%||0.5%|
|Loomis Sayles Core Plus||26.1%||40.9%||27.6%||5.2%||0.2%|
|Wells Fargo Core Bond||32.9%||28.1%||29.7%||8.8%||0.5%|
*Includes agency and private mortgages. Source: P&I’s Mutual Funds Most Used by Defined Contribution Plans survey and Bloomberg LP