The active versus passive debate is a long-standing one, in which active bond managers have had more success than their equity counterparts, according to Morningstar.
An analysis of its 38 equity categories found the average one-year success rate for active managers was 29.1 per cent last year, up slightly from 28.7 per cent in 2023. “However over the past decade it remained disappointingly low at 14.2 per cent,” says Jose Garcia-Zarate, senior principal of manager research at Morningstar.
Active bond managers had a better run, he adds. In an analysis of 21 categories, their average one-year success rate stood at 53.5 per cent in December 2024, up from 46.5 per cent a year earlier.
Managers found an easy way to add value via the management of duration, according to Morningstar’s report. But the figure is down from 58.3 per cent in June 2024, which Garcia-Zarate says indicates that some were unable to adapt to quickly changing conditions in the second half of the year.
Research by Pimco also shows that over the past 10 years about a third of passive corporate bond managers beat the benchmark, while approximately 62 per cent of active corporate bond managers have done so.
“Passive replication is difficult for bonds,” says Pimco’s head of UK wealth, Terry Oh. In the bond market, active managers on average beat passive solutions, which he says is partly because of how the market is structured.
“Over half of the market is owned by non-economic participants, ie central banks, pension plans and insurers who may need to buy bonds regardless of price. This creates opportunities for active managers in the bond market, which is why you see the median manager beating passive peers.”
Where to find alpha
Evangelia Gkeka, a senior analyst for fixed income strategies at Morningstar, says there are certain fixed income sectors in which outperformance is mostly found.
“Investment-grade credit remains an area where active bond managers have more latitude to add value over extended periods. Managers can add value here with security selection, sector allocation and active duration bets. High-yield corporate bonds are another area where active funds have added value with security selection and sector allocation.
“On the contrary, it has been more difficult for active government bonds to outperform. Yield levels have been relatively low for an extended period after the global financial crisis, and the higher fees of active funds have been a significant burden against cheap passive funds in a low return environment.”