Graphic: The passive fixed-income glut – Pensions & Investments

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

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