Talk About the Benefits of Actively Managed Bonds Investors are turning to passive equity strategies, prompted by evidence that suggests that most active managers have failed to beat their benchmarks. They charge steeper fees too, which sets the bar higher for actively managed funds to outperform. The trend into passive fixed income has also accelerated recently, but while research indicates passive may make sense for stocks, it tells a different story for bonds. Fee dispersion between active and passive is lower for bonds than for equities While it is true that active bond managers charge a higher fee than their passive counterparts, the difference between fees, as measured by the median expense ratios for U.S. ETF and U.S. open-end mutual fund Morningstar categories, is lower for bonds than for equities. This means that actively managed bond strategies are typically closer in cost versus passive bond strategies than actively managed equity strategies are versus passive equity strategies over time. And, for active bond managers, that fee, which is typically used to employ credit research teams and risk analytics professionals, has the potential to pay for itself via higher return potential over time. Download Chart Actively managed bonds have outperformed passive over the longer term Unlike the median active equity manager, which has underperformed its passive counterpart over the last 10 years, the median active bond manager has outperformed its passive peer by about 50 basis points. While these gains may not seem substantial, they compound over time and, if sustained, represent meaningful total return potential. Another key thing to note here is that passive managers typically underperform the index, due to fees. Download Chart Actively managed bonds have outperformed their benchmarks across a range of categories About 65% of active bond managers outperformed their benchmarks across a range of popular Morningstar categories. In contrast, only about 37% of active managers in popular equity categories have outperformed their benchmarks. Download Chart Lower expected returns make active alpha more important than ever Forward-looking returns are closely correlated with today's yields, which are near all-time lows. By going passive today, your bond portfolio will return approximately today's yield (less than 3%) on the index, minus fees, annually. In contrast, an active manager may be able to outperform over time, after fees. Download Chart The compounding value of active bond management In a low-return environment, excess returns will account for a larger portion of total return going forward. As the hypothetical chart to the right shows, an excess return of 50 basis points annually will deliver $7,544 in total return, after fees, over a 10-year period, demonstrating that even a small gain over the benchmark can dramatically improve investment returns over the long term. There are, of course, many differences between active and passive and both approaches offer potential benefits, costs and risks. Download Chart More on Actively Managed Bonds Section: Tag: Date: Expert: Ticker: Reset All Viewpoints Bonds Are Different The case for active management in fixed income investing is strong. Smart Charts Access our library of economic and market charts that you can download, save and share.