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Active Bond Managers At Play
Bond pickers say the disadvantages of the index and geopolitical turmoil give them a leg up. By Christopher C. Williams
MANAGING MONEY ISN’ T ROCKET SCIENCE. And active bond managers aren’ t Einsteins. But some might get a reputation for it if they’ ve consistently beaten fixed-income benchmarks at the same time active equity managers have underperformed theirs.
Tom Graff, for one, would like to good-naturedly disavow investors of that notion that all active bond managers are geniuses.“ I’ ll let you in on the dirty little secret of why bond active bond managers outperform much more often than active stock managers,” says Graff, chief investment officer of Baltimore-based Facet Wealth, which oversees $ 4.7 billion in assets.“ It’ s not that the bond guys are smarter. It’ s that they have a [ systematic ] advantage.”
Specifically, he says, the main benchmark for fixed-income, the Bloomberg U. S. Aggregate Bond Index, is overloaded with low-yielding securities such as U. S. Treasurys rather than higher-yielding corporate bonds. So while passive bond managers are tracking a low-yielding index, active managers are free to deviate and snap up more of the corporate bonds that fall outside it.
“ So what bond managers do is, they will just underweight Treasury bonds [ and ] overweight corporate bonds,” he says.
Large And Inefficient
Overall, the bond market is large, complex, illiquid and inefficient, making it easier for active managers to add alpha against their category indexes than it is for managers of equities. Importantly, the Agg covers just a sliver of the overall $ 58 trillion bond market, giving nimble active managers many opportunities to pick up mispriced securities among corporate or municipal names.
That’ s a far cry from the stock world, where it’ s harder for active managers to unearth mispriced securities— partly because the main benchmark of stocks, the S & P 500, is so much more efficient and transparent and offers Main Street investors easier access to the biggest names. That makes it hard for fund managers to gain an information premium there.“ When everything in the [ S & P ] index is priced efficiently, when you have, say, 3,000 different large-cap mutual funds chasing 500 stocks, it’ s hard to find mispriced securities,” adds Graff.
Long History Of Outperformance
The performance divergence between active equity and bond managers goes back decades. If you look at rolling three-year periods over the past 20 years, as Morningstar has, you find that the average actively managed intermediate-core bond fund beat the Agg in 59 % of those periods. The active equity average fund, meanwhile, beat the S & P 500 in only 17.6 % of those three-year time frames. The Agg itself did well in 2025, returning 7 % with the help of strong corporate bond performance, a resilient economy and Federal Reserve interest rate cuts. But even with a strong year for the index, active managers’ showing on top of that was“ stellar,” Morningstar says.
While six of the 10 largest bond index funds outperformed their category averages, all 10 of the largest active bond funds, led by several Pimco funds, beat their benchmarks, according to the Chicago-based fund tracker. And investors rewarded that performance last year by investing about $ 282 billion in active bond funds as of the end of November, surpassing the $ 263 billion recorded in all of 2024, says Morningstar Direct, the firm’ s flagship
38 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2026 WWW. FA-MAG. COM