The Secret to Beating your Portfolio Benchmark
Much has been written about the challenges active managers face in outperforming market benchmarks. The data for active equity outperformance can often be disparaging with 80%-95% of managers underperforming their benchmarks. Equity markets are highly efficient; information is rapidly incorporated into prices, and long-term outperformance after fees is difficult to achieve.
Fixed income, however, is fundamentally different. And it is precisely why we believe the secret to beating your portfolio benchmark lies in active fixed-income manager selection rather than equity selection.
Fixed Income Markets Are Structurally Inefficient
Unlike stocks, most bonds do not trade on centralized exchanges. The majority trade over the counter, with less transparency, wider bid-ask spreads, and far less frequent price discovery. Bonds can trade infrequently, especially in corporate and credit-oriented markets. Unlike equities, where investors have one equity ticker for AT&T to follow, there are currently between 120 and 130 unique outstanding bond issues for AT&T.
Information can flow into bond prices more slowly, creating pricing dispersion—two bonds with similar characteristics can trade at meaningfully different valuations. For experienced managers, these inefficiencies represent opportunity.
Market Composure
Benchmarks reflect what is available in the market. The large majority of issuance in fixed-income are fixed rate bonds which can hold substantial duration risk. Historically, forecasting the direction of interest rates has not reliably generated outperformance. Investing in floating rate credit, largely eliminating duration risk and focusing on credit risk can deliver higher returns with less risk. More information can be gained by researching an individual company’s ability to service debt than by predicting the direction of U.S. interest rates, which are influenced by a large number of variables. By focusing your research on more reliable data and predictable outcomes you can generate consistent alpha.
Sector Fixed Rate % Floating Rate % Primary Reason
Treasury ~98% ~2% Market stability and benchmark status.
Corporate ~80-85% ~15-20% Flexibility and hedging
Municipal ~95%+ ~2-5% Budgetary predictability
Bond Benchmarks Reward Borrowing, Not Strength
Most fixed income benchmarks are weighted by the amount of debt outstanding. This means that the largest borrowers receive the largest representation in the index, regardless of credit quality or balance sheet health.
Active managers are not required to own the most indebted issuers simply because they dominate an index. Instead, managers focus on:
- Credit quality and balance sheet trends
- Compensation for risk relative to yield
- Avoiding deteriorating issuers before problems become obvious
This flexibility is a key reason active fixed income strategies can outperform over time.
Risk Management Is Central to Fixed Income Outcomes
We believe most investors fundamentally misunderstand the potential severity of duration risk. For example, if we think of the least risky investment possible, many may respond, “U.S. Treasuries”. However, if we purchase a 30 year U.S. Treasury bond and yields spike significantly as they did in 2021 a U.S. Treasury bonds suddenly display equity-like downside. How can the least risky security deliver such a high level of principal loss, duration. Currently, a 100-year bond issued by the Austrian government in 2020 is priced at $43 or almost 60% below its issue price. You will get all your money back plus interest but not for another 95 years.
What the Evidence Shows
Independent research consistently shows that active fixed income managers outperform their benchmarks at a higher rate than equity managers, particularly in corporate, high-yield, and global bond categories. While no approach is immune to short-term volatility, the data supports active management as a durable strategy in fixed income. The below exhibit shows that in the 3 categories listed even the median manager outperformed their benchmark in 10 out of 11 periods listed.
| 1 year | 3 year | 5 year | 10 year | |
| Global Corporate Fixed Income (XGGB) | 2.2% | 2.86% | -1.60% | |
| Median manager | 5.3% | 6.1% | 2.1% | 3.2% |
| Median manager alpha | 3.1% | 3.2% | 3.7% | N/A |
| 1 year | 3 year | 5 year | 10 year | |
| High Yield Fixed Income (XHY) | 6.8% | 8.2% | 3.1% | 4.6% |
| Median manager | 6.2% | 8.2% | 3.8% | 5.4% |
| Median manager alpha | -0.6% | 0.0% | 0.7% | 0.8% |
| 1 year | 3 year | 5 year | 10 year | |
| Canadian Corporate Plus Fixed Income (XCB) | 4.4% | 6.5% | 1.3% | 2.9% |
| Median manager | 4.6% | 6.7% | 1.7% | 3.2% |
| Median manager alpha | 0.2% | 0.2% | 0.4% | 0.3% |
Our Philosophy
We manage fixed income with the understanding that it serves a critical role in client portfolios: capital preservation, income generation, and diversification. The structure of bond markets allows experienced managers to add value through discipline, selectivity, and risk control—advantages that passive strategies cannot replicate.
For these reasons, we believe active fixed income management remains a prudent and effective approach for long-term investors.