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Active Management In Fixed Income Can Bring Significant Advantages

Company Release - 4/18/2017 2:30 PM ET

PASADENA, Calif., April 18, 2017 /PRNewswire/ -- The "active versus passive" debate rages on, but one fixed income manager believes there is no question which side bond investors should take: active, by a landslide.

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Western Asset Management senior portfolio manager Carl L. Eichstaedt made his views clear in a recent roundtable panel on Asset TV focusing on active management.

"There's just so many examples of how active has an advantage." Mr. Eichstaedt said. "[And] as markets have become less liquid, I think that the advantage of active management over passive is increasing," The advantage is particularly acute in fixed income, noted Mr. Eichstaedt, given current macro conditions.

"An active [fixed income] manager who generally yields more than the index, owns less government securities, wins in three out of four scenarios: spreads tighten, you win; spreads stay the same, you win; and spreads widen a little bit, but not enough to compensate for the yield advantage, you also win."

"The only time that active managers will generally lose to the index," he said, "will be a period of extremely risk-off, something like we saw in the [Financial] Crisis."

The leading US bond index has a duration of over five years; "If you believe rates are going to rise, and you're an index manager, you're kind of stuck with that."

By contrast, active managers can lower or raise duration around targets, within reasonable amounts.

"Our view at Western Asset is rates actually don't have to rise that much," he said. "There's a lot of cyclical factors that I think are underestimated. If you look around the world, to a German or a Japanese investor whose rates are frictionally zero, our U.S. Treasury market looks like a veritable bargain."

Overall, Mr. Eichstaedt declared, "We're more sanguine about the direction of rates -- but having said that, to have the flexibility to move them around that duration of the index is invaluable."

Like equity managers, he emphasized, large style differences exist between fixed income managers.

"Some are corporate only; some are mortgage only; some take interest rate risks; some don't take interest rate risk," Mr. Eichstaedt said. "To be a manager like Western Asset, which has offices around the globe, which doesn't pigeonhole itself into being one of those types, and concentrates more on the value of the security, I think gives you a big advantage over the index."

About Carl Eichstaedt

Carl L. Eichstaedt is a Portfolio Manager at Western Asset.  He joined the firm in 1994 and has over 31 years of experience.  Formerly, he worked as a Portfolio Manager at Harris Investment Management and Pacific Investment Management Company (PIMCO) and as a Director, Fixed Income at Security Pacific Investment Managers.  He holds an MBA from Kellogg Graduate School of Management at Northwestern University and a Bachelor of Science degree from the University of Illinois.  He also holds a Chartered Financial Analysis® designation.  In 2014, Mr. Eichstaedt, Chief Investment Officer, Ken Leech and Portfolio Manager Mark Lindbloom were named Morningstar's US Fixed-Income Manager of the Year for the Western Asset Core Bond and the Western Asset Core Plus Bond funds.

About Western Asset Management
Founded in 1971, Western Asset Management is one of the world's leading fixed-income managers with $444.5 billion in assets under management as of Sept. 30, 2016. From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Dubai, the company provides long-term, value-oriented investment services for a wide variety of global clients, across an equally wide variety of mandates. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. To learn more about Western Asset Management, please visit

About Legg Mason
Legg Mason is a global asset management firm with $728.4 billion in assets under management as of October 31, 2016. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. High yield bonds are subject to greater price volatility, illiquidity, and possibility of default. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Tapering of the Federal Reserve Board's quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The views expressed are those of the portfolio managers as of the date indicated, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.

©2017 Legg Mason Investor Services, LLC, (LMIS) member FINRA, SIPC. Western Asset Management Company and LMIS are subsidiaries of Legg Mason, Inc.


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SOURCE Legg Mason, Inc.