Fixed Income and Passive Asset Allocation Outperformance in Brazil

Abstract

The fixed income asset class has outperformed stocks for more than two decades in Brazil. Passive equally weighted strategic asset allocation portfolios outperformed actively managed balanced funds in the same period. These vehicles are accessible to individual or less sophisticated investors. However, is this evidence persistent so that it should be considered in future asset allocation decisions? This investigation employs Bayesian bootstrapping simulations because lengthy time series that are still economically relevant are not available, which is likely the case in other emerging markets. The results indicate that the previous evidence is quite likely persistent. Investors should hold a significant proportion of their assets in the fixed income class in Brazil, and it could pay off to carry out an equally weighted strategic asset allocation strategy by means of indexed funds, thus saving in management and incentive fees charged by actively managed balanced funds. This article also presents economic scenarios and discussions of asset manager characteristics to support these conclusions. These conclusions may apply to investors in other emerging markets as well, particularly in those with high interest rates and a reduced choice of investment vehicles.

TOPICS: Fixed income and structured finance, mutual funds/passive investing/indexing, simulations, emerging markets