Active Bond Fund Performance Versus Their Index Benchmarks

Active Bond Fund Performance Versus Their Index Benchmarks

Passive index investing is all the rage in the stock market. As of 2021, roughly 45 percent of all equity funds are passively managed. This post will look at active bond fund performance versus their index benchmarks. After all, bonds are an integral part of a proper asset allocation.

The growth in passive investing has largely been due to lower fees and a history of underperform by active equity fund managers since the financial crisis in 2009.

Today, the largest fund managers in the world are passive index proponents, Vanguard and Blackrock.

But what about active and passive bond funds? How have they performed in this backdrop? Let's find out!

Active Bond Fund Performance Versus Their Benchmarks

Passive bond funds now make up 25.3 percent of the market in total bond funds. Although the percentage is not as high as passive equity funds, bond funds are heading in the same direction.

High-grade index funds now have a 29.9 percent share, compared to 29.7 percent, while high-yield has increased to 13 percent from 12.9 percent a year prior.

Below is a chart showing that the majority of actively run Institutional Bond managers also underperform their respective benchmarks over a 10-year period between 2008-2018.

If you are a fan of active bond funds, you want to ideally choose a category where the percentage of active managers underperforming net of fees is 50% or less.

Therefore, the only categories that look good are Core Plus Funds, Investment-Grade Corp Funds, Agency MBS Funds, Emerging Market Blended Currency Funds, and Global Aggregate Funds. That's actually a good number of categories where active bond Institutional Managers outperform, unlike with active equity Institutional Managers, where only one category is at 50% or under.

Active Bond Fund Underperformance Over 10 Years

Active Fixed Income Bond Institutional Management Performance versus Passive Funds

Below is a chart highlighting the percentage of bond Mutual Fund managers underperforming most of their benchmarks over a 10-year period as well. Mutual Funds are what retail investors like you and me can invest in.

The following categories have less than 50% of active Mutual Funds net of fees underperforming their respective benchmarks: Investment-Grade short Funds, Global Income Funds, General Municipal Debt Funds, and California Municipal Debt Funds.

Active Fixed Income Bond Mutual Fund Performance Versus Passive

Related: The Case For Buying Bonds: Living For Free And Other Benefits

The Downside To Passive Bond Funds

Recently, more and more people are saying passive bond investing is in a bubble. But the criticism largely comes from active fund managers and active investors who are ignoring the underperformance data and trying to hold onto their legacy.

Critics of index bond funds say they are too susceptible to the changes in a few market-moving stocks, virtually guaranteeing that investors won’t generate alpha, while also potentially posing liquidity risks in times of market stress.

The reality is that to build wealth, you must control what you can control. Every investor should keep their investing fees to a minimum. Investors should save and invest consistently and aggressively, while properly allocating capital in a risk-appropriate manner.

Paying higher fees for funds that underperform over the long-run makes no sense. Therefore, investors should allocate the majority of their bond investments to passive funds. Whether the allocation is 51% – 100%, it's up to each investor to decide.

Build Wealth Wisely

The older and wealthier you get, the greater bonds should be a part of your investment portfolio and retirement portfolio. Active bond funds have a place in your portfolio. However, just know that most managers underperform over the long run.

Bonds are less volatile, provide income, and tend to outperform during difficult times as investors seek the safety of bonds.

Always Stay On Top Of Your Portfolio

In addition to having a proper asset allocation, every investor should do an investment checkup to eradicate excessive fund management fees.

To do so, I use Personal Capital's free Investment Analyzer tool. Sign up, link your investment portfolios, and have Personal Capital analyze where you could be saving.

Below are the results of my 401(k) fees. I had no idea I was paying $1,748.34 a year in fees. If I did nothing, it would grow to over $85,000 in fees in 20 years. As a result, I sold old my actively run funds and replaced them with low-cost ETFs.

Excessive Portfolio Fees

Not only can you analyze your investment portfolios with Personal Capital. You can also track your net worth. Further, you can also run some great simulations with your retirement funds through their Retirement Planner.

Personal Capital Retirement Planner Free Tool
Personal Capital's Free Retirement Planner

Keep Building Wealth For The Long Term

There is no rewind button in life. Make sure you end up with a little too much money than with too little. The last thing you want to do after you retire is go back to work!

Sign up with Personal Capital for free and to grow your wealth. I've been using Personal Capital since 2012. Since then, I have seen my net worth more than triple. Stay on top of your money folks!

About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments. They now generate roughly $300,000 a year in passive income. His favorite investment is real estate crowdfunding.

He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009. It is is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.