With Fixed Income, It's Time to Think About Outcomes

• The Bloomberg U.S. Aggregate Bond Index is heavily skewed toward interest rate risk with limited credit spread exposure, only includes bonds rated by major agencies, and excludes floating-rate debt
• Multi-sector bond strategies outperformed the U.S. Agg by over 3% annualized over the past 5 years with lower volatility, according to Morningstar data
• Active management offers better balance of credit and interest rate risk, broader diversification across bond sectors, and flexibility to meet varied client objectives compared to rigid benchmark indices

Summary: Fixed Income Investment Strategy Shift Toward Active Management

Key Argument: Traditional passive bond strategies tracking the Bloomberg U.S. Aggregate Bond Index may be inadequate for modern fixed income investors, according to analysis from Janus Henderson highlighting the benefits of active, multi-sector approaches.

Major Limitations of the Agg Index:

• No new bond market sectors added in 40 years
• Excludes unrated bonds and floating-rate debt
• Heavy concentration in U.S. Treasuries, agency mortgage-backed securities, and investment-grade corporates
• Disproportionate exposure to interest rate risk with minimal credit spread risk

Performance Data:

Over the past 5 years, Morningstar's multi-sector bond category outperformed the U.S. Agg by over 3% annualized while delivering lower volatility, demonstrating the value of diversified income streams and balanced risk exposure.

Active Management Benefits:

• Better balance between credit spread and interest rate risk
• Broader diversification across bond sectors
• Enhanced risk-adjusted returns over long-term horizons
• Greater flexibility to meet varied client objectives

Market Implications:

The analysis suggests a shift away from "pure beta" passive bond ETFs toward active strategies may be warranted. Janus Henderson notes that today's investors are more sophisticated and demand flexibility rather than the rigid, static nature of traditional benchmark indices. The firm promotes its strategic asset allocation (SAA) approach as an improved "homebase" for fixed income positioning.

Bottom Line:

While passive aggregate bond funds offer low costs and broad exposure, their structural limitations may prevent investors from achieving optimal fixed income outcomes in current market conditions.