In September 2008, Ben Bernanke, the then Chair of the US Federal Reserve, was forced to lead the US economy into uncharted territory by using quantitative easing (QE) for the very first time, says Louis Hutchings CFA, Portfolio Strategist at Nedgroup Investments.

A bold move, certainly. But he had little option other than to give it a try: the interest rate lever had already been pulled and economies were at a juncture, with financial collapse or a dice roll the only options.

Thankfully, the dice roll of QE paid off and economies have since rebuilt themselves from their nadir. But the move undoubtedly had an unsettling impact on financial markets, with winners and losers aplenty.

Active management was one of the most high-profile losers - with question marks being raised about its use at a time when passives were able to generate a better return at a lower cost.

There is, however, reason to think this trend is due to reverse course. 

To understand how, let's imagine you compete on a weekly basis for your local ten-pin bowling team, "Livin' on a Spare". You are a serious team, full of star bowlers and have become accustomed to winning a strawberry flavoured slushy after several podium finishes. 

This week is different though - Bernanke decides to leave the barriers up, and you are rightfully aghast. 

Instead of "The Gutter Gang" shrieking with excitement when one of their players notch a single pin, they have been able to reach a respectable score, ricocheting their way towards a strike or two. Indeed, so have all the other teams, with dispersion across the board a lot lower than normal and average scores much higher. 

Having the barriers up in bowling is akin to the impact of QE on fixed income over the last 15 years - it has significantly reduced volatility. With volatility low, individual bond returns became clustered around that of an index, making it incredibly challenging for even the most skilled managers to add value.

In fact, if you were to look at the proportion of active fixed income managers who outperform the benchmark across closely tracked bond peer groups , you would find that only 49% of managers outperform in low volatility environments, versus 60% in high volatility environments. A huge swing, where during low volatility, less than half of active managers outperform while in high volatility, nearly two-thirds do.

Naturally, focusing purely on average manager performance has its limitations - it tells us nothing about the range of performances across managers. Has volatility helped boost active manager returns across the board, or have the best pulled up the worst? To better understand this, we need to look at the dispersion of returns across individual bond managers. 

When doing so, we find that during highly volatile periods, the dispersion of bond manager returns more than doubles. So, despite volatility tending to improve the prospects for the average manager, the gap between the top and bottom performers widens significantly. In other words, quality pays and selection matters.

Implications for bond investing going forward

In the same way a barrierless bowling lane highlights a truly accomplished bowling team, volatility creates opportunities for active managers to add value for clients by using their skill to target the most attractive bonds, avoid the worst, and in doing so, allocate capital to its most efficient use. The opposite is true, however, for the unskilled manager, whose fallibility is brought to the fore by volatility. 

Over the last 18 months, markets have gone through a period of abrupt transition, with central banks across the globe raising interest rates at the fastest pace in decades. Despite many of the major economies converging towards peak rates, it is reasonable to expect the recent bond market volatility to continue.

Global markets have now left a sedative period of QE but are yet to fully transition to one of QT - a transition that will be happening at differing rates and intensities across the globe as countries find themselves in very different cycles.

By Louis Hutchings CFA, Portfolio Strategist at Nedgroup Investments.