Active bond fund managers have been able to outperform passive counterparts in the bond market, with approximately 67 percent of active bond funds surpassing their average passive peers over a 12-month period leading up to June 2024. This success can be attributed to strategic positioning during a period of higher-than-expected interest rates and narrowing credit spreads.
Active bond managers typically favor shorter duration bonds and take on more credit risk compared to indexed peers. Morningstar's analysis highlights that the success rate among active bond funds is the highest across all asset classes.
However, the broader landscape for active management remains mixed, with less than half of U.S. equity funds outperforming their indexed counterparts. Real estate funds have maintained a strong performance streak, with 66 percent of active managers beating passive peers.
Examining the long-term performance of active bond funds reveals that over the past 15 years, more than 38 percent have outperformed their index counterparts, with 80 percent of surviving funds achieving this benchmark. The asset-weighted returns of active bond funds consistently exceed those of index funds across all fixed-income categories. However, the long-term track record for active funds remains subpar, with many failing to deliver consistent outperformance.
The bond market has witnessed significant institutional shifts, including Citigroup's decision to close its municipal bond underwriting and trading business. As the bond market continues to digitize and become more transparent, the role of active managers may evolve further. Investors will need to stay informed about these changes and assess how they align with their investment objectives.