Skip to Content

Will 2023 truly be the year of active bond managers?

Commentary by: Jeffrey A. Johnson, Principal, Head of Fixed Income Product

After a brutal year for fixed income, I often hear two recurring themes in the industry—that bonds are back, and that 2023 will be the year when active management will truly shine. But both need caveats.

After a dismal 2022, it’s true that bond valuations are now lower, yields are up, and so are long-term expected returns. But central banks aren’t necessarily finished hiking interest rates, and a recession is still possible. All that means we’re not done with volatility over the short term.

Greater volatility can mean greater opportunity for active management. But greater opportunity does not necessarily guarantee greater outcomes. Before we go there, let’s look at what does put the odds in favor of active managers.

Setting the odds in favor of winning active fixed income managers

Vanguard believes in both active and passive investing, but our faith in active is contingent on managers meeting a number of criteria. Among them:

  • A deep and experienced team, with expertise across sectors and global regions.
  • A clear investment philosophy and robust investment process. If a manager cannot explain their approach, stay away.
  • A true-to-label approach with transparency. Bonds are meant to be a defensive asset class. They should behave that way, with no surprises.
  • Stringent and systematic risk controls, preferably with independent teams that can provide objective opinions and risk assessments.
  • Relative consistency in performance and in the portfolio, not causing a whiplash experience for investors.

All the above should be packaged with low costs, as even the most talented managers cannot consistently overcome the hurdle of high operating and transaction costs. According to Lipper data as of year-end 2022, the average five-year annualized return for investment-grade intermediate fund category (which includes funds that we consider to be core holdings) lagged the return of the benchmark (the Bloomberg U.S. Aggregate Bond Index) by a mere 8 basis points, or 0.08 percentage point. According to the Investment Company Institute, the average expense ratio for bond funds in 2022 was 0.37%. Choosing funds with lower expense ratios by itself stacks the odds more in favor of active managers.

The challenges facing active management

If it was easy for active managers to outperform benchmarks in volatile times, then a larger share of managers would have outperformed their indexes not just in 2022, but also over longer periods that capture varying environments for interest rates and inflation.

Instead, at best, the record was mixed. The chart that follows shows the percentages of funds in select categories that underperformed their benchmark indexes over various periods as of year-end 2022. The longer periods include volatile years in the bond markets—among them 2008, 2013, 2015, 2020, and 2022. The results demonstrate that active managers who can add alpha are a shrinking minority over longer periods, even when opportunities abound in the form of market disruption and wider dispersion of returns.

Fewer active bond managers outpaced benchmarks over time

Notes: This chart illustrates the data for five representative categories from the last semiannual SPIVA U.S. Scorecard. The full scorecard had data for 17 fixed income fund categories and compared their performance against the relevant Bloomberg, Standard & Poor’s, or iBoxx indexes as benchmarks. Over one year, 11 out of 17 categories had a majority (more than 50%) underperform; over three years, 12 of 17 categories had the majority underperform; over five years, 16 of 17 categories had the majority underperform; and over 10 and 15 years, 16 of 16 fund categories had the majority underperform (one fund category did not have a full track record over 10 and 15 years).

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Vanguard, using data from the SPIVA U.S. Scorecard as of December 31, 2022.

The bottom line for investors

Identifying that shrinking minority in advance—the future elite among managers who beat their bogies over the long run—is the real challenge for investors who choose to go down the active route.

But it doesn’t have to be an “either/or” decision. There’s room for both active and passive investments. Ultimately, for investors, it’s a matter of preference. Some might prefer the predictability (relative to market benchmarks) of passive funds. Others have the appetite for potential outperformance and the risk tolerance to accept potential underperformance. Still others might hedge with both.

For those who want active management, whether wholeheartedly or partially, the outlook for active is supported by where we are in the economic cycle. As the economy slows and different sectors and issuers diverge in navigating the contraction, some disciplined active manager will successfully separate the winners from the losers and dynamically adapt to new information and new conditions.

Although outperformance is never guaranteed, investors who use a disciplined manager selection process, coupled with low costs, increase the potential for positive and consistent alpha over the long term. Investors should have the patience to let these factors play out, not just in 2023 but over the next decade.


For more information about Vanguard funds, visit to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.



Your use of this site signifies that you accept our terms and conditions and privacy policy.

© 2022 VIGM, S.A. DE C.V. Asesor en Inversiones Independiente. All rights reserved.

This website is aimed at institutional investors and sophisticated investors, so Vanguard Mexico will not have any responsibility for the use given to the information contained in this page, by investors that are not sophisticated or institutional.

In the event of discrepancy between the information on this website and that contained in the legal documentation of the products, the latter shall prevail.

VIGM, S.A. de C.V. Asesor en Inversiones Independiente (“Vanguard Mexico”) registration number: 30119-001-(14831)-19/09/2018. The registration of Vanguard Mexico before the Comisión Nacional Bancaria y de Valores (“CNBV”) as an Asesor en Inversiones Independiente is not a certification of Vanguard Mexico’s compliance with regulation applicable to Advisory Investment Services (Servicios de Inversión Asesorados) nor a certification on the accuracy of the information provided herein. The supervision scope of the CNBV is limited to Advisory Investment Services only and not all services provided by Vanguard Mexico.

This material is solely for informational purposes and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, nor shall any such securities be offered or sold to any person, in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. Reliance upon information in this material is at the sole discretion of the reader.

Securities information provided in this document must be reviewed together with the offering information of each of the securities which may be found on Vanguard’s website: or

Vanguard Mexico may recommend products of The Vanguard Group Inc. and its affiliates and such affiliates and their clients may maintain positions in the securities recommended by Vanguard Mexico.

The information contained in this material derived from third-party sources is deemed reliable, however Vanguard Mexico and The Vanguard Group Inc. are not responsible and do not guarantee the completeness or accuracy of such information.

This document should not be considered as an investment recommendation, a recommendation can only be provided by Vanguard Mexico upon completion of the relevant profiling and legal processes.

This document is for educational purposes only and does not take into consideration your background and specific circumstances nor any other investment profiling circumstances that could be material for taking an investment decision. We recommend to obtain professional advice based on your individual circumstances before taking an investment decision.

There is no guarantee that any forecasts made will come to pass. Past performance is no guarantee of future results.

Important Information regarding risk of investment

ETF Shares can be bought and sold only through a broker and cannot be redeemed with the issuing fund other than in very large aggregations. Investing in ETFs entails stockbroker commission and a bid-offer spread which should be considered fully before investing. The market price of ETF Shares may be more or less than net asset value.

All investments are subject to risk, including the possible loss of the money you invest. Investments in bond funds are subject to interest rate, credit, and inflation risk. Governmental backing of securities apply only to the underlying securities and does not prevent share-price fluctuations. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Stocks of companies are subject to national and regional political and economic risks and to the risk of currency fluctuations, these risks are especially high in emerging markets. Changes in exchange rates may have an adverse effect on the value, price or income of a fund.