After years of near-zero yields, fixed income is once again offering meaningful income opportunities. However, while all-in yields have risen materially, investors continue to face a more complex environment characterised by inflation uncertainty, geopolitical risks and credit spreads that remain near historical lows.
Against this backdrop, an important question emerges: Are active global bond managers adding value through skill, or simply by taking on more risk? Over the past three years, the average manager in Frontier’s Global Aggregate Manager Peer Group outperformed the Bloomberg Global Aggregate Index by around 100 basis points, prompting a closer examination of the drivers behind that outperformance. Drawing on discussions with fund managers across London, New York, Boston, Charlotte and Los Angeles, as well as Frontier’s own manager research and performance analysis, this paper explores how active managers are positioning portfolios in today’s fixed income markets, where opportunities are emerging, and what differentiates the strongest performers from their peers. The analysis finds excess returns have been driven primarily by credit selection and allocation, rather than large directional duration positions. More importantly, the strongest outcomes have not simply been the result of taking more credit risk, but of being more selective about where that risk is taken, balancing attractive opportunities with downside protection and portfolio resilience. The paper also examines whether active managers are becoming increasingly similar in their positioning, or whether meaningful diversification benefits remain available through manager selection. While many managers generate returns from similar headline sources, the underlying exposures often differ significantly, highlighting the potential benefits of combining complementary approaches within a portfolio. Higher yields have undoubtedly improved the opportunity set for fixed income investors. However, tight spreads, benchmark concentration and uneven downside protection mean manager selection remains a critical consideration. This paper explores why, in Frontier’s view, the most effective active managers combine disciplined credit selection, diversified sources of alpha and a demonstrated ability to balance income generation with portfolio resilience.
