While active equity funds often fail to beat benchmarks, active management in fixed income tells a different story. Allspring CEO Kate Burke notes over 90% of their active bond strategies outperform over multiple time horizons, attributing this success to deep, proprietary credit research.
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When successful macro traders played the 'Crystal Ball' game, they won not by trading constantly, but by being highly selective. They almost exclusively traded bonds and only acted on the few days where they perceived a high expected Sharpe ratio, avoiding action otherwise.
The central task for capital allocators is to identify investment managers with a proven, durable edge—be it in sourcing, operations, or strategy—that allows them to consistently capture alpha in markets that are otherwise becoming more efficient.
Counterintuitively, high-yield corporate bonds are expected to perform better than investment-grade credit. They do not face the same supply headwind from AI-related debt issuance, and their fundamentals are supported by credit team forecasts of declining default rates over the next 12 months.
In the post-zero-interest-rate era, the “everything rally” driven by liquidity is over. Higher base rates mean companies must demonstrate fundamental strength, not just ride a market wave. This environment rewards active managers who can perform deep credit selection, as weaker credits no longer outperform by default.
In bond investing, where upside is capped at a promised return, superior performance comes from what you exclude, not what you buy. The primary task is to eliminate the bonds that will default. Once those are removed, all the remaining performing bonds deliver a similar, contractually-fixed return.
BlackRock's CIO of Global Fixed Income argues that unlike equities, fixed income is about consistently getting paid back. The optimal strategy is broad diversification—tilting odds slightly in your favor and repeating it—rather than making concentrated, high-conviction "bravado" bets on specific market segments.
Goodwin argues against the passive "index-hugging" approach to credit focused on coupon payments and agency ratings. Diameter's edge comes from approaching credit like an equity long-short fund, constantly analyzing what macro and sector trends will change security prices over the next 3 to 24 months to generate total return.
Judging the credit market by its overall index spread is misleading. The significant gap between the tightest and widest spreads (high dispersion) reveals that the market is rewarding quality and punishing uncertainty. This makes individual credit selection far more important than a top-down market view.
Barclays' research shows that the best investment performance comes from combining fundamental analysts with systematic signals. The key is to filter out trades where the two perspectives diverge, as this method is exceptionally effective at eliminating potential losing investments and generating alpha.
Tim Guinness claims that despite the rise of passive investing, it is not difficult for thoughtful active managers to outperform. He calls indices "stupid" because they are inherently momentum-driven and mechanically buy high. He argues a disciplined approach can overcome the fee hurdle that holds many back.
