Investors often think of bonds as anchoring portfolios—providing income for living and other expenses and stability in more volatile times. As a practical matter, however, this has often led them to take a more static approach to bond investing, whether relying on exposures to broad fixed income market indices via passive funds or “core” strategies that closely track them, or by “laddering” a series of bonds across maturities.

All of these approaches can have a place in portfolios, depending on individual needs. A low-cost index fund takes individual security dynamics out of the equation, with income and total return potential roughly matching the overall market as defined by the index. Many traditional core bond funds may permit some degree of active management, but still closely shadow the broad market. Meanwhile, a laddering strategy largely eliminates interest rate risk and helps the investor generate a specific income stream.

We believe that investors should consider taking a more comprehensive approach to fixed income—not to change their income requirements or risk tolerance but rather to expand the opportunity sets they provide—both for return potential and risk mitigation.

Specifically, we think that applying an active approach to fixed income investing that spans sectors, geographies, credit quality and duration (sensitivity to interest rates)—broadly described as a multi-sector strategy—can help investors get the most out of their “safe” assets while maintaining effective diversification.

Removing Boundaries

The U.S. Aggregate Bond Index is a common measure of fixed income performance and a go-to benchmark for many index funds and core fixed income investment strategies. It tracks a large bond universe—some $50 trillion—but by design carries certain limitations. The “Agg” primarily comprises U.S. government debt, mortgage-backed securities, investment grade corporate credit and a limited set of asset-backed securities. The index notably underrepresents, or excludes, non-investment grade credit, international government and corporate debt, private placements, broader securitized assets and exposures to emerging markets.

In our view, approaching the bond market through a broader opportunity set, beyond what is included in the U.S. Aggregate, may allow active managers to deliver attractive total return potential and consistent income through market cycles, especially during periods of elevated market volatility.

The ability to overweight certain sectors—and underweight them at times of heightened risk—can add to the potential benefit of an active manager. For example, following the COVID crisis of 2020, spreads (excess yield over Treasuries) on corporate credit were incredibly high, providing a historic opportunity for those in a position to capitalize by rotating into those deeply discounted securities. A similar relationship took place in 2008, following the Global Financial Crisis, in the mortgage market.

By the same token, the flexibility to position interest rate exposures, and make changes based on market conditions, can also add value. For example, if a manager believes that the economy is weaker than consensus, that may suggest the likelihood of more aggressive interest rate cuts by the Federal Reserve, creating an opportunity to shift interest rate exposures to possibly take advantage of rising or falling yields. A view as to the acceleration of potential inflation could, in turn, suggest value in reduced duration exposure or an overweight in inflation-protected securities.

Multi-Sector’s Performance Premium

The potential benefits of multi-sector exposure are evident from performance data, which shows strong performance over the past 10 years by multi-sector funds and ETFs relative to the U.S. Aggregate Bond Index.

In the left chart, multi-sector funds' higher Sharpe ratio reflects more favorable results on a risk-adjusted basis, while their positive alpha indicates the return generated through security selection and other methods distinct from market exposure. The right chart maps the historical 12-month rolling excess returns of multi-sector funds. While the category outperformed most of the time, there were periods of relative weakness tied to market stresses given the funds’ higher credit exposure, but also periods of strong relative results amid recovery.

What About Laddering?

While laddering has had staying power as a means to maintain fixed income exposure, it has certain drawbacks. First, since maturing bonds are automatically reinvested into longer maturity bonds, there is no yield curve management. As the yield curve changes, some spots on the curve may offer higher income than others. Based on the shape of the curve and expectations for Federal Reserve actions, it is possible to generate returns though active yield-curve positioning.

Moreover, a ladder assumes that every time a bond matures it will coincide with a good time to reinvest in terms of absolute yields and opportunities available in the market—something that may not occur. An active approach can avoid this problem by taking advantage of pricing opportunities as they happen.

In a point particularly relevant to municipals, there are frequently times in an active individual account where the manager can execute tax-loss swaps (selling a bond with a capital loss and buying a similar one), something that may be more challenging with a programmatically maintained ladder.

Reading the Landscape

If one is to move beyond index-driven or laddered investing, it is crucial to understand the importance of expertise, research and execution capabilities in actively managing fixed income portfolios.

Price dislocations can occur in virtually any area of the market. They may be driven by structural issues such as the issuance of excess debt in the face of limited demand, or by an overreaction to market weakness or misreading of central bank intentions. Whole market sectors may carry different characteristics and complexities that may obscure relative value. At the company level, fundamental strengths or weaknesses may not be fully appreciated by the market at large, generating opportunities to augment or avoid risk exposures.

It’s worth noting that, although passive funds and ETFs track certain indices, their actual holdings only represent a sample of a given bond universe. In the case of the U.S. Aggregate, the number of securities has grown from about 3,500 at inception in 1973 to roughly 13,855 as of September 30, 2025. This means that many individual issues fly below the radar, contributing to market inefficiencies that are available to be exploited.

For portfolio managers, we believe it is important to have deep research capabilities across the span of fixed income sectors in order to accurately assess their relative value. They should also have the infrastructure necessary to act on high-conviction ideas and maintain portfolio exposures at levels that maintain a balance of risk and return.

Management for a Changing World

Today’s volatile economic and political landscape presents challenges that merit a thoughtful approach. Global central bank monetary policies are no longer synchronized at zero and economic performance is diverging globally. The evolution of technology, trade relationships and the amount of leverage in the system allow for greater potential to take advantage of relative value opportunities in what is a very new market environment for fixed income investors.