Active investing beats passive choices

Mangers of actively managed funds see individual selection crucial in debt securities

Like junk bonds, which have been shown to perform better in actively managed portfolios than passive ones, leveraged loans also appear to have a similar bias.

Since their inception in 2013, the two actively-managed leveraged loan exchangetraded funds in the market — the $1.25 billion (Dh4.6 billion) First Trust Senior Loan ETF, symbol FTSL, and State Street Corp’s $1.6 billion SPDR Blackstone/GSO Senior Loan ETF, which goes by SRLN — have posted better returns than the two index-tracking loan ETFs — the $498 million Highland/iBoxx Senior Loan ETF, symbol SNLN, and Invesco Ltd’s $9.3 billion PowerShares Senior Loan Portfolio, or BKLN, according to data compiled by Bloomberg.

Individual selection

The reason is simple, say the managers who oversee actively managed loan portfolios.

With these debt securities, individual selection is crucial — and an index-driven approach doesn’t provide it.

“We see this as an area in the market where active is a better avenue because mangers can be more selective and leverage their expertise in an area that’s less efficient than large US stocks,” said Ben Johnson, director of global ETF and passive strategy research at Morningstar Inc.

Debt indexes differ from equity indexes because of the focus on size. In stocks, market capitalisation is an indication of investors’ view on the company, the larger it grows the more optimistic they are. So a market value-weighted index captures this.

Company’s outlook

But loan size says nothing about a company’s outlook, just that people were once willing to lend it a certain amount of cash.

Take iHeartMedia Inc, the San Antonio, Texas-based radio broadcaster that headlines the distress debt playlist. Given that iHeart has $6.3 billion of term loans outstanding as of December 31, 2016, both passive ETFs list the name among their top 15 holdings.