Fixed income investing can sometimes feel like a black box: opaque, obscure, and hard to understand. There are certainly many misconceptions about this asset class. One is that fixed income investments are simply lower-return, passive strategies tied up in long maturities. Another is that active management in fixed income is best suited only for investors with a high risk tolerance.
In reality, active fixed income strategies can be tailored with precision to align with an investor’s objectives, liquidity needs, and risk profile. These strategies often offer more flexibility and nuance than passive approaches allow.
Since 2020, rising inflation and interest rates have created challenges for fixed income investors. At the same time, they’ve opened new opportunities for generating meaningful returns.
The role of a skilled active manager is particularly compelling. They seek to identify inefficiencies, anticipate change, and deliver performance that not only exceeds benchmark expectations but also aligns more closely with individual client needs.
What is Active Investing?
An active fixed income investment strategy involves anticipatory trading to leverage market shifts. Unlike passive management, which aims to replicate index performance, active management uses targeted trading, deep research, and tactical flexibility to generate alpha. Managers can adjust duration, rotate across sectors, and improve credits with reduced exposure to deteriorating ones, all in real time.
Is This for Me?
For investors seeking a bespoke financial plan for their assets, active management can be an appealing strategy. An active manager, like Endeavor, has the freedom to select credit spreads, durations, and sectors that aren’t included in traditional bond indices. This can create unique opportunities to outperform.
More importantly, active managers can access less liquid, off-benchmark securities that may offer higher yields. This “liquidity premium” is typically unavailable to passive funds. Similarly, active managers are not required to hold questionable securities that a passive manager must include in order to match a benchmark.
If your broader investment philosophy emphasizes sophistication, precision, and the pursuit of above-market results, active fixed income management can be a powerful complement to your portfolio.
What About the Risk?
While it’s true that active management can involve more risk than passive strategies, the reality is more nuanced. Passive funds are not insulated from market volatility. In fact, they are often concentrated in the largest debt issuers by design, regardless of credit quality. They are also structurally limited to react only when the index itself rebalances.
By contrast, active managers are dynamic. They can respond to market changes quickly, hedge against downside risks, and even hold cash or reduce interest rate exposure when conditions warrant. Passive strategies also tend to hold an outsized allocation to low-yielding Treasury securities, which makes it harder to recover from portfolio missteps elsewhere.
Key Approaches to Active Management
The U.S. fixed income market is vast, with roughly $59 trillion in outstanding debt. Only about half is represented in the Bloomberg U.S. Aggregate Bond Index (“the Agg”).1
Why does that matter? Because an active manager has access to a much broader toolbox, including securities and sectors unavailable to passive funds.
According to Morningstar, over the recent three-and five-year periods, a majority of active intermediate core and core-plus bond funds have outperformed their passive peers, net of fees. This has been especially true during episodes of rate volatility and market stress.2
That outperformance reflects not only different bond selection but also greater flexibility in managing duration, credit risk, and sector exposure.
Examples of Active Approaches Include:
- Credit Analysis: Active managers seek bonds likely to rise in price due to improving credit conditions or overlooked fundamentals.
- Sector Rotation: Managers identify segments of the bond market poised to benefit from specific economic conditions, including off-index areas, allowing for quick reallocation.
- Duration Management: By adjusting a portfolio’s sensitivity to interest rate changes, active managers can protect capital in rising-rate environments or pursue returns when rates decline.
- Liquidity Advantage: Many active managers can trade in less liquid or newly issued bonds that offer enhanced yield potential. These are opportunities passive funds typically cannot access due to benchmark constraints.
- Tactical Flexibility: Active strategies allow for real-time allocation adjustments. This gives managers a powerful edge during market dislocations, central bank shifts, or inflation surprises.
Case in Point: Navigating 2022’s Bond Market Turmoil
In 2022, when rising interest rates punished core bond indexes, many passive funds experienced significant losses. Active managers who shortened duration, rotated into floating-rate or securitized assets, and avoided deteriorating credits were able to materially reduce drawdowns. In some cases, they even posted positive returns.
In markets like these, flexibility isn’t just helpful. It’s essential.
The Importance of Active Management Right Now
The pandemic triggered a wave of monetary and fiscal responses that have sharply altered the fixed income landscape. Now more than ever, adopting a set-it-and-forget-it approach is not optimal.
Markets are moving quickly, and passive portfolios are often slow to respond. Active management is a nimble approach that can help your portfolio stay ahead of market indexes.
One of our core beliefs is that portfolio management is about using the right tool for the right job. If you’re interested in learning how active management can help you achieve your goals, talk to our team today.
- Guggenheim Investments, The Risk Mitigation Advantage in Active Fixed-Income Management. https://www.guggenheiminvestments.com/perspectives/portfolio-strategy/risk-mitigation-advantage-in-active-fixed-income ↩︎
- Morningstar, 4 Top-Performing Core-Plus Bond Funds. https://www.morningstar.com/bonds/4-top-performing-core-plus-bond-funds ↩︎
