This is the key to outperforming in the bond market, Pimco fund manager says

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Active equity fund managers have lagged the S&P 500 for nine years in a row.

But, one expert that manages $300 billion in bond assets says active management in the Treasury market tells a different story.

“Active equity market-makers and portfolio managers have more of a challenge ahead of them. In fact, only about 25% of them end up overachieving their benchmark rates. But, on the bond side, it’s actually much different: 80% or more, on average, actually outperform the benchmarks,” Jerome Schneider, PIMCO managing director, told CNBC’s “ETF Edge” on Monday.

Pimco’s actively-managed bond ETF has outpaced over the past three months with a gain of more than 2%; the TLT Treasury bond ETF and the AGG iShares Bond ETF are up around 1.5%. Over the past three years, the AGG ETF is down 2%, while the BOND ETF is down just 0.5%.

“If you can look at a portfolio, understand the portfolio risks, find and highlight those risk attributes you like – not just interest rate, but create a diversified portfolio that includes credit risk, mortgage-backed opportunities, asset-backed securities, high-quality assets – you’re able to generate additional income,” he said.

The BOND ETF holds 60% mortgages, 25% investment grade credit, 10% U.S. government bonds, and 4% high-yield credit. Schneider says the ETF is overweight “higher-quality assets that produce income,” such as mortgages, while being underweight corporate credit.

Schneider adds that the difference in active management in the bond market versus the stock market comes down to being able to exploit more inefficiencies.

“As active managers, we’re not simply trading to trade,” he said. “You’re trading to produce capital appreciation. So you’re hoping to buy cheap bonds, selling them when the appreciation happens on the rich side.”

For example, in the fourth quarter when stocks plummeted and corporate credit repriced, Schneider says he added to positions.

“At the same time, as those yields moved higher and they gradually moved lower as we entered January and February, that’s a good opportunity to prune the risk, be selective and then take those gains,” he said.

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