PIMCO has published a very interesting research note on “Passive Versus Active Management of TIPS.” As one of the best active fixed income managers in the world, its views are always interesting.
When it comes to TIPS, PIMCO's key argument in favor of active management is that relatively illiquid markets and predictable index fund activity (e.g., “market on close” buy and sell orders and index rebalancing around auctions) facilitate arbitrage by active managers and reduce the return to passive investors. We don’t doubt that these costs are real. However, PIMCO’s note fails to put them into any type of context, so we’ll do that for them.
PIMCO’s actively managed Real Return Bond Fund (PRTNX) has a 3% front end load and a 1.15% annual management fee. Over the past three years, it delivered average annual nominal returns of 5.56%, with a standard deviation of 10.08%. In comparison, Vanguard’s Inflation Protected Securities Fund (VIPSX) has no front end load and annual expenses of 0.20%. Over the same three year period, its average annual return has been 5.20% with a standard deviation of 8.66%.
On balance, while we respect the arguments made by PIMCO, when you put the additional costs they cite in context, it is hard not to conclude that the Vanguard fund is the superior offering.
Disclosure: No positions.