The case for equity index investing is amongst the strongest in finance. Study after study finds that most active equity managers fail to beat their benchmarks—especially after costs. For investors focused on evidence, the conclusion is clear: own the market, minimise fees, and avoid chasing elusive alpha.

But fixed interest presents a possible exception. Even those committed to index funds for equities sometimes choose active management in bonds. This might seem like a contradiction—but is it?

In this post, we explore why active management has retained a foothold in fixed income, the structural features of bond markets that make indexing less straightforward and what the data say about whether active bond managers truly deliver alpha. Along the way, we compare the record of active management in bonds to that in equities, using the latest results from SPIVA’s global scorecard.

Bonds vs Equities: The Pricing Mechanics

Equities are priced based on two uncertain factors:

Future cash flows – linked to company profits, growth, and reinvestment
The discount rate – reflecting investors’ required return

Both inputs are difficult to forecast. This makes equity markets volatile and susceptible to sentiment, leading to frequent mispricings. Yet paradoxically, the equity market is relatively efficient: stocks are liquid, widely followed, and their prices quickly reflect publicly available information (Fama 1970). Passive investing thrives in this environment.

Bonds differ. Their future cash flows are fixed: a series of coupon payments and a principal repayment at maturity. As a result, bond pricing is largely driven by the discount rate, which incorporates current interest rates and credit spreads. That simplicity suggests less scope for mispricing—yet fixed income markets are far from perfectly efficient.

Why Bond Indexing Isn’t So Clean

1. Debt-Weighted Indices Are Flawed

Most bond indices are weighted by the amount of debt outstanding. The more a company or government borrows, the more of your portfolio you lend to them.

This approach ignores creditworthiness. Unlike equity indices—where larger weights go to more valuable firms—bond indices systematically overweight the most indebted issuers, not necessarily the most reliable (Ilmanen, Maloney, and Ross 2021).

2. Illiquid and Fragmented Markets

Bond markets are vast but opaque. Many individual bond issues:

Trade infrequently
Lack transparent pricing
Are held to maturity by institutions

This reduces price discovery and creates persistent inefficiencies, especially in areas like high-yield debt, structured credit, and emerging markets.

3. Central Bank Intervention Distorts Prices

Monetary authorities influence bond markets through:

Policy rates
Quantitative easing (QE)
Yield curve control

These interventions can distort yields across maturities and credit tiers, creating arbitrage opportunities or valuation gaps for active bond managers to potentially exploit.

4. Bonds Are Used for More Than Return

Investors often hold bonds to:

Reduce portfolio volatility
Provide liquidity
Generate predictable income
Match liabilities (e.g. pensions)

In this context, a benchmark-weighted index may not reflect an optimal or appropriate exposure. Active management allows customisation of duration, credit risk, and yield curve positioning to better match investor goals.

What the Evidence Says: SPIVA 2024

Theory aside, the key question is whether active bond managers actually deliver alpha.

The SPIVA Global Mid-Year 2024 Scorecard provides an authoritative look. Below is a table showing the percentage of active funds that underperform their benchmark across multiple categories.

SPIVA 2024 Global Scorecard Extract

This table comes from the SPIVA Global Mid-Year 2024 Scorecard, published by S&P Dow Jones Indices. It reports the percentage of actively managed funds that underperform their respective benchmark indices, across a wide range of global asset classes, geographies, and currencies.
Each row refers to a specific fund category, showing how many active funds in that category failed to beat the index over various time periods (YTD, 1-, 3-, 5-, and 10-year horizons). The higher the percentage, the worse the active managers did.
For example:
US General Government Bond Funds: 100% of active managers underperform over 10 years.
US Large-Cap Equity Funds: 84.71% underperform the S&P 500 over 10 years.
EUR High Yield Bond Funds: 73.97% underperform their benchmark over 10 years.
The data are based on actual fund performance net of fees, and only include surviving funds—meaning the numbers are conservative, as they exclude those that closed down or merged due to poor performance.

Observations:

In equities, underperformance rates over multi-year periods exceed 85% across the US, Europe, Canada, and Japan.
In fixed income, results are more nuanced:
- US short-term investment-grade bond funds show strong recent results (only 15.95% underperformed over 1 year), possibly due to interest rate dislocations.
- Yet over 5–10 years, the majority of active managers still underperform, particularly in broad categories like general government bonds and investment-grade credit.

In summary: active bond managers may have an edge in volatile or less-liquid segments, but over time, fees and turnover erode these advantages—just as in equities.

Supporting Academic Research

Academic studies align with SPIVA’s findings and help explain why long-term underperformance persists.

Elton, Gruber and Blake (2003) examine US bond funds and find that whilst some outperform before fees, they underperform net of fees. The implication is that any manager skill is more than offset by its costs.
Del Guercio and Reuter (2014) show that many investors choose bond funds based on distribution incentives, not performance. For example, sales commissions or platform preferences. Retail investors often end up in high-fee, underperforming funds due to how products are sold.
Busse, Goyal and Wahal (2010) find that institutional investors (e.g. pension funds) are marginally better at selecting top-performing bond managers than retail investors—but even here, outperformance is not persistent.

These findings reinforce the idea that whilst outperformance is possible, it is rare and difficult to sustain.

The Rise of Systematic Bond Strategies

Rather than relying on traditional discretionary active funds, some investors now turn to systematic fixed income strategies—a middle ground between active and passive.

These strategies:

Avoid index flaws by reweighting based on fundamentals or risk
Target credit and term premia with more precision
Use rules-based frameworks to manage duration and yield curve exposure
Maintain low turnover and transparent fees

Firms like Dimensional and AQR apply these principles to fixed income in much the same way that they do in equities. The goal is to capture compensated risks efficiently, without the guesswork or high costs of discretionary management.

Why Costs Matter Even More in Bonds

Bonds generally offer lower expected returns than equities. That makes fees even more important.

A bond fund returning 3% annually and charging 0.75% gives up a quarter of the return to fees.
A passive ETF charging 0.05% preserves nearly all of it.

Because the margin for error is smaller, cost control is critical in fixed income. Over time, fees compound just like returns—but in the wrong direction.

Conviction, Active Share, and Why Most Active Managers Fail

Another important line of research comes from Hendrik Bessembinder, who finds that the vast majority of stock market gains come from a tiny fraction of stocks. We will get onto why this is pertinent to fixed interest shortly.

In his seminal 2018 paper, he shows that:

‘The entire net gain in the US stock market since 1926 is attributable to the best-performing 4% of listed companies’ (Bessembinder 2018).

This has two profound implications for active management:

Stock returns are extremely skewed: Most stocks underperform Treasury bills; only a few drive the market’s long-term returns.
To outperform the index, active managers must hold those few big winners—and to do that, they must deviate meaningfully from the index benchmark.

This aligns directly with Martijn Cremers’ Active Share research. Cremers argues that funds with low active share—those that hug the benchmark—are unlikely to outperform, precisely because they are unlikely to concentrate in the handful of winning stocks. Worse, they charge high fees for delivering index-like outcomes.

In contrast, high active share and high conviction—especially when paired with patience (low turnover)—improves the odds of capturing the market’s biggest winners vs a low Active Share approach; But with the caveat that attempting to pick those winners consistently is an almost impossible task, as explored in my previous posts ‘Can Active Fund Managers Consistently Outperform the Market?’ parts one and two.

So What About Bonds?

Bessembinder’s findings are less directly applicable to bonds, because bond returns are more normally distributed. There’s no equivalent of the ‘ten-bagger’ growth stock in gilts or investment-grade corporates. Most bonds behave as expected: they return their yield (unless they default), and the upside is capped.

This means:

There are fewer runaway winners in bonds for active managers to seek out.
Conviction in bonds often relates to duration tilts, curve positioning, or credit exposure—areas where it is harder to define and where excess returns are smaller (Ilmanen 2022).

Thus, whilst equity markets may reward bold, differentiated stock-picking, bond markets offer less upside for conviction-led active bets. This further supports the argument that systematic, low-cost fixed income strategies may be the more reliable approach.

Conclusion: A Measured Case for Active Fixed Income

Whilst the case for indexing in equities is unambiguous, the fixed income landscape is more complicated. Index flaws, market segmentation, central bank distortion and risk management create a setting where active management might, in some contexts, add value.

Yet most active bond funds fail to deliver consistent outperformance—particularly once fees are considered. The SPIVA data show that the pattern of underperformance seen in equities extends to fixed income over longer periods.

For this reason, some investors now favour systematic, evidence-based strategies in bonds: those that correct index flaws, target well-understood risks, and do so with discipline and low cost.

In the end, the question is not ‘active or passive’, but: which risks are you targeting, and are you paying a fair price to access them?

References

Bessembinder, Hendrik. 2018. ‘Do Stocks Outperform Treasury Bills?’ Journal of Financial Economics 129 (3): 440–457. https://doi.org/10.1016/j.jfineco.2018.06.004

Busse, Jeffrey A., Amit Goyal, and Sunil Wahal. 2010. ‘Performance and Persistence in Institutional Investment Management.’ Journal of Finance 65 (2): 765–790.

Cremers, Martijn. 2017. ‘Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity.’ Financial Analysts Journal 73 (2): 61–79. https://doi.org/10.2469/faj.v73.n2.6

Cremers, Martijn, and Antti Petajisto. 2009. ‘How Active Is Your Fund Manager? A New Measure That Predicts Performance.’ Review of Financial Studies 22 (9): 3329–3365. https://doi.org/10.1093/rfs/hhp057

Del Guercio, Diane, and Jonathan Reuter. 2014. ‘Mutual Fund Performance and the Incentive to Generate Alpha.’ Journal of Finance 69 (4): 1673–1704.

Elton, Edwin J., Martin J. Gruber, and Christopher R. Blake. 2003. ‘Incentive Fees and Mutual Funds.’ Journal of Finance 58 (2): 779–804.

Fama, Eugene F. 1970. ‘Efficient Capital Markets: A Review of Theory and Empirical Work.’ Journal of Finance 25 (2): 383–417. https://doi.org/10.2307/2325486

Ilmanen, Antti. 2022. Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least. Hoboken: Wiley.

Ilmanen, Antti, Jonathan Maloney, and Ronen Ross. 2021. ‘How Do Bond Investors Think?’ Journal of Portfolio Management 47 (6): 36–54. https://doi.org/10.3905/jpm.2021.1.295

S&P Dow Jones Indices. 2024. SPIVA Global Mid-Year 2024 Scorecard.

Passive vs Active Fund Management in Fixed Interest (Bonds)