Why investors are thinking twice about “passive” investing in global corporate bonds
We explore three advantages of choosing active over passive strategies in global corporate bonds.
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Fund flows into actively managed global corporate bond funds are dwarfing the pace of passive. Here are three reasons why investors might be thinking twice before relying on passive strategies when investing in global corporate bonds.
Fund flows into actively managed global corporate bond funds are dwarfing the pace of passive
Source: Schroders Client Insight Unit, Fund sector: Bonds- Global Corporates - Broadridge, November 2025
1. Index trackers favour the most indebted companies
Unlike equity indices, which are weighted by market capitalisation, corporate bond indices are weighted by the amount of debt outstanding from the issuing companies. This means that the more debt a company issues, the larger its weight in the index and the bigger percentage weight in the fund.
Of course, a larger amount of debt outstanding doesn’t necessarily translate into a weaker credit – a large company that has issued a lot of debt might still have a strong overall balance sheet and actually very positive fundamentals. Our point is simply that by blindly tracking an index, you’re unable to distinguish the resilient corporates from those with a deteriorating credit quality.
Nor do strategies that track an index consider an individual corporate bond’s value. There may be circumstances where it’s advantageous to hold a lower rated issuer (enjoying the additional credit premium earned) - and sometimes not.
Evidenced below, we can see that following recession (the grey bars represent US recession), there’s typically a rise in the proportion of BBB rated corporates (the lowest investment grade rating) within investment grade indices, reflecting a broad deterioration of credit quality across the corporate bond market.
It’s these very periods where you generally get greater issuer diversification and the opportunity to pick up “cheap bonds” relative to their “real value”. However, you need a process which can identify between those issuers that have been unfairly punished alongside a market sell-off to ensure that these “cheap bonds” aren’t “cheap” for good reason.
It’s necessary to ensure that “cheap bonds” aren’t “cheap” for good reason
Source: Schroders, ICE BoA indices: EUR, GBP, USD investment grade corporate bond indices
2. By investing in passive strategies, you’re missing out on a huge opportunity
The global corporate bond universe, of over 3,000 issuers and 17,000 issues, provides a huge opportunity and the ability to pick the “winners”, while avoiding the “losers” can make a real difference to overall fund returns.
Did you know that it’s the big US banks that monopolise the top issuers in global investment grade corporate bond indices? The largest issuers perhaps, but as the chart below shows (the blue dot represents the excess return of US banks), not always the best opportunity.
US banks: the biggest issuers – but not always the best opportunity
Source: Schroders, ICE BoA indices: EUR, GBP, USD investment grade corporate bond indices – annual excess returns
While within these sectors there’s also divergence between issuers, again a bond only offers real value if it’s not simply cheap for a reason. That’s where fundamental analysis and risk controls really come into play.
3. Low cost doesn’t necessarily mean better value
Assuming perfect tracking error (i.e. that the portfolio is well-represented by the issuers in the index) passive strategies will inevitably underperform the market (i.e. benchmark) after management fees are paid.
Corporate bonds trade over the counter, with uneven liquidity and pricing. While both passive and active strategies face similar challenges, with an active approach there’s the opportunity to exploit this mispricing as well as negotiate better execution instead of simply bearing the cost. This can turn a negative into a positive.
The main attraction of passive investment strategies is their lower fee structure; however, active strategies may provide better value despite their generally higher fees. Put simply, the vast number of alpha opportunities (or chances to enhance returns over an index) within corporate bond markets - only available to active strategies- can more than compensate for the fee differential.
The chart below illustrates the average outperformance of active Euro Corporate bond funds over passive, net of fees. Of course, top-performing active funds will exceed these average returns, an advantage not available for passive funds.
Relying on passive funds – means settling for average performance
Source: Schroders, Morningstar – taking the lowest fee paying share class – EUR Corporate Bond peer group. December 2025
In this environment – where the outlook is uncertain and corporate bonds are, by historical standards relatively expensive – we believe investors are realising the benefit and value of active strategies.
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