Fidelity: Active managers can sidestep AGG Treasury tilt

In a recent webinar titled A Fresh Look at Fixed Income, Fidelity strategists Justin Danfield and Elise Randazzo outlined how concentration in the Bloomberg U.S. Aggregate Bond Index (AGG) has increased and how active managers can pursue opportunities outside that benchmark. The session was moderated by Roxana Islam.

Panelists highlighted that Treasury securities now make up close to half of the AGG, versus roughly 25% before the 2008 global financial crisis. The AGG’s market capitalization is about $31 trillion and represents just under half of the U.S. bond market. Credit sectors such as high-yield, leveraged loans, emerging-market debt and many structured products sit outside the index.

Randazzo cautioned that index rules weight issuers by outstanding debt. “The largest borrowers get the biggest weight, and so the more debt an issuer has outstanding, the larger that representation is of the index regardless of underlying fundamentals,” she said.

Panelists described the current environment as one of higher-for-longer interest rates with inflation remaining persistent. Absolute yields are relatively high while corporate credit spreads sit near cyclical lows. Issuance has climbed this year, in part from large technology firms raising funds for artificial-intelligence investments, and demand for new deals has remained strong.

Danfield emphasized a role for ETFs in that market setup, calling the fixed income ETF “a price discovery tool” that can help investors when market trading is choppy.

Randazzo flagged risk-reward issues at current spread levels, saying spreads near cyclical tights create an asymmetric return profile where potential downside from spread widening can exceed limited upside from further compression.

Fidelity presented an active research approach that combines equity and credit analysis, with analysts meeting company management jointly to form a multi-dimensional view of issuers. The firm argued that this integrated work can help identify idiosyncratic opportunities and sectors outside the AGG.

As an example of an active option, the panel discussed the Fidelity Total Bond ETF (FBND). FBND follows an unconstrained core-plus mandate, keeping a high-quality core exposure while allocating up to 20% to “plus” sectors such as high-yield bonds, loans and non-benchmark structured credit.

Panelists said ETFs add intraday liquidity, transparency and lower-cost access to fixed income markets while also aiding price discovery. They recommended that investors comparing passive and active fixed income allocations consider index concentration and the portions of the market not represented by the AGG.