Artemis Fund Managers' fixed income veteran Stephen Snowden has embraced the volatile markets of the most recent crisis in his near-30 decade career, which has offered the opportunity for outperformance as the first to be significantly impacted by "blanket bombing" passive funds in the corporate bond market.
Head of fixed income Snowden, who after joining Artemis last year launched the Artemis Corporate Bond fund, has been buying "family silver" assets such as legacy bank bonds dumped by passive vehicles in the March peak of coronavirus-related volatility, and believes the proliferation of trackers in the bond market is a significant source of alpha for active managers going forward.
Speaking to Investment Week, Snowden explained that in his 26-year career this is the first crisis he has seen where "passive funds have been a very large portion" of the corporate bond market, which has led to significant dislocations as investors pull out of trackers and force them to sell valuable assets.
Snowden said: "Passive funds have a blanket bombing approach to investing. Within reason, they buy everything when the markets going up, and they sell everything when the markets going down.
"In March, as ETFs were facing material outflows, they had to liquidate assets. In the first two weeks of the lockdown we saw some market moves that just made no economic rational sense, but made complete sense looking through the lens of forced sellers in a market that is panicking.
"As everything sold off, almost uniformly, this created quite remarkable opportunities".
As a result of the "blanket selling", Snowden said he was able to rotate out of more "Covid-exposed" areas of the market into less affected sectors "without a material drop in credit spread or our yield".
"When the market panic is done, the passive vehicles start getting money back in again," he added.
"As a result, the areas that bounced the hardest were the ones that should never have been sold off in the first place - areas such as telecoms."
The capacity to take advantage of passive selling has helped to bolster the performance of Artemis Corporate Bond fund, which is the best performing IA Corporate Bond sector fund over one year to 10 November, having returned 10.6% compared to the sector average of 5.4%, according to FE fundinfo.
"Going forward, we will see the continued march of passive funds," Snowden said.
"When the markets are strong, the rising tide will lift all boats, and when the market is weak, the falling tide will sink all boats.
"This non-rational economic market dislocation caused by the blanket bombing approach will allow active managers, if they are genuinely active, to take advantage of this large-scale, uniform selling of everything."
