Passive investing for stocks, but how about bonds?
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Passive investing for stocks, but how about bonds?

4 Apr
10 Jan
  • Warren Buffett has famously advised passive investing as a winning strategy for individual investors. While research shows it makes sense for stock investing, it seems to be a different story for bonds.
  • Due to differences in the fixed income markets, passive strategies do not work as well for bond investing. Learn more in this article as we explain why it is the case.
  • To get started with Endowus on your wealth journey, click here.

Warren Buffett thinks that the smartest thing your money can do is climb into a hammock and take a nap (of course, he's smarter than we are, so he doesn't do this personally). While research has shown that passive investing makes sense for stock investing, research shows that it's a different story for bonds.

Let's look at the numbers: based on analysis by Morningstar (as of June 2023) over the past 15 years, 54% of active US corporate bond funds managed to beat its passive peers. This is compared to only 9% of active US large blend equity funds managing to beat its passive peers in the same period and on average underperforming by 1.5%.

How active bond managers outperform passive managers

We would love to embrace Warren Buffett's romantic laissez-faire view on investing in its entirety, but as evidence-based investors, we think a little more work is required before shutting both eyes and dozing off.

Not all asset classes and markets are created equally. In the case of the bond market, it is possible to get higher returns with the same risk through active investments. 

Here are some reasons why it might be the case:

1. Bond markets are made up of irrational players

There are 'noneconomic' players moving huge amounts of money that do not always act rationally in the economic sense. Central banks prioritise their country's growth and inflation mandates over portfolio returns.

For example, when central banks implement quantitative easing policies, they would buy their own government bonds to boost spending in order to reach inflation targets and stimulate economic growth. This 'irrationality' affects the market.

2. Bond ratings and bond indices allow for mis-pricing opportunities

In the stock market, the price of a stock reflects all known information on the company. For some reason, we humans decided not to place our trust in the power of markets when it comes to bonds — we allow ratings issued by organisations to help the world decide the 'quality' of a company's bond.

Funnily enough, these ratings almost always lag changes in a company's bond price, which means that the market participants see the changes in a company's fundamentals before the rating agencies can get around to changing their laggard ratings.

As investors, we would very much prefer to leverage on the collective wisdom of the market and use the information in prices, as we do for stocks. This means having someone in the driver seat of our bond portfolio, so we are not stuck behind an old smoke-spewing truck when the light turns green. But unfortunately, benchmark indices have to track these laggard ratings religiously, which is inefficient for fixed income index investors.

3. Active bond managers charge a much lower management fee

The general rule is that if fund managers can get away with high fees, they will. Luckily for us, over the years they have lost the ability to justify their high fees due to a lack of outperformance, which has put downward pressure on their share of the pie. The fee dispersion between active and passive managers in bonds is much smaller than in equities, and at a level where active bond fund managers are taking home less (in their fees) than their median outperformance over their benchmarks.

Don't blindly turn away from active bond fund management. The passive strategy in bond investing unfortunately does not work as well as it does in stock investing. 

Accessing Best-In-Class fixed income funds through Endowus

Endowus Hong Kong offers a diverse range of Best-In-Class fixed income active funds managed by world-class bond managers such as AllianceBernstein, JP Morgan Asset Management, and PIMCO.  

Here are some selected fixed income funds on the Endowus Fund Smart platform, you can also access the full list here.

Spotlight on fixed income funds

Fund name, ISIN Exposure Why it's worth a look Fund-level fees after Cashback*
JP Morgan Income Fund

HKD: LU1128926307
USD: LU1128926489
US • Seeks income flexibly across full spectrum of fixed income
• Investing in almost 2,000 securities, the fund seeks out income opportunities across the entire fixed income spectrum with active duration management amid a changing interest rate environment
PIMCO GIS Global Bond Fund

USD: IE0002460198
Global • Seeks to maximise total return, consistent with preservation of capital and prudent investment management, by investing at least two-thirds of its assets in a diversified portfolio of fixed income instruments denominated in major world currencies
• Offers a diversified, global investment-grade fixed income exposure to investors with various sources of excess returns generation
PIMCO GIS Income Fund

US • Largely US focused, multi-sector portfolio of both high-yielding assets and high-quality assets
• Actively managed and uses a broad range of fixed income securities that seek to produce an attractive level of income while maintaining a relatively low risk profile, with a secondary goal of capital appreciation

*Where a fund has both HKD and USD share classes, the fees of the HKD share class are shown. Fund-level fees after Cashback on trailer fees include the fund's total expense ratio (TER) and the trailer fee rebate, but do not include the all-in Endowus Fee.

Read more:


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Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

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Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.


Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus HK Limited (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus HK Limited, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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Nothing contained [in this article] should be construed as a solicitation, an offer to buy or sale, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction in any jurisdiction in which such solicitation, offer to buy or sale would be unlawful under the securities laws in such jurisdiction. No information included [on this website/ in this article] is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product, or instrument; or to participate in any particular trading strategy. Investors should seek independent financial and tax advice before making any investment decision.

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Complex Products

Some of the funds contained in this article are complex products and investors should exercise caution when investing in these products. Though these products have been authorised by the SFC, authorization does not imply official recommendation. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

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