Investing Insights Why Bond Funds Benefit from Active Management
Mar 27, 2026
Maciej Kowara, principal in fixed-income strategies at Morningstar who studies active bond tools, and Eric Jacobson, senior principal and bond-market expert at Morningstar, discuss why active bond funds can outperform passive peers. They cover market inefficiencies, who trades bonds, where mispricings arise across bond types, examples when indexing hurt investors, and the tools and exposures active managers use.
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Bond Market Structure Creates Active Opportunities
- Active managers can outperform in bonds because the market has concentrated ownership, infrequent trading, complexity, and fragmentation.
- Eric Jacobson explains treasuries are efficient but corporates and securitized debt contain mispricings due to size, structure, and low trading.
Index Weighting Created Hidden Crisis Exposure
- Index rules can concentrate risky issuers inside benchmarks during crises, exposing passive holders to growing risk.
- Eric Jacobson cites Greece post-2008 and U.S. car and telecom firms that ballooned in indexes then became downgrades and larger shares of junk markets.
Choose Active Bond Funds By Cost And Expertise
- Do look for low-cost share classes and managers with track records and resources that match the fund's niche before buying active bond funds.
- Eric Jacobson warns not to chase the highest yielding funds because yield usually signals higher risk.