Making the Case for Active Management
July 24, 2025
Investment professionals have long known that active management is an indispensable tool for tailoring portfolios to meet investors.
Recent reports and news stories are highlighting the value-added that active management provides in today’s markets.
In Fixed Income
In a July 2025 report titled “The Bond Market as Fertile Ground for Active Management,” Eric Jacobson, senior principal at Morningstar, argues that active management has an advantage in many sectors of the bond market.
He notes that the complexities of the bond market create inefficiencies that active management can capitalize on. Concentrated ownership of bonds, coupled with infrequent trading, together increase the likelihood that bond prices will deviate from fair value, opening up opportunities for active managers. These price-value gaps are especially likely to occur in the securitized sectors, where bond structures are particularly complex.
And the bond market overall is prone to “meaningful market distortions” that active managers might be able to steer around but that index investors cannot avoid.
At the same time, indexing in the bond markets is more difficult than in the equity markets. Index coverage is not comprehensive for significant segments of the bond market.
Market cap-weighting indexing in bonds is also fundamentally different from market cap-weighted indexing in stocks. When weightings increase in a stock index, it’s because the stock has been successful. But when weightings increase significantly in a bond index, it’s because the company has issued more debt and, therefore, has a higher risk of failure.
Jacobson stresses that investors need to be conscious of the fees that they pay for active management, but he concludes that “fairly priced active management in fixed income makes sense for fundamental reasons rooted in the nature of bond markets.”
Beyond the Conventional Wisdom
In July, Professor Martijn Cremers appeared on The Rational Reminder Podcast to bring nuance to the debate over active versus passive management.
Cremers reviewed his 2019 paper, “Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds,” a work sponsored by the Active Managers Council, which concludes that “the conventional wisdom is too negative on the value of active management.”
In the discussion, Cremers also highlighted his more recent paper, “Passive bond fund management is an oxymoron (or the case for the active management of bond funds,” which makes arguments similar to those in the Morningstar report.
In sum, podcast hosts Benjamin Felix and Cameron Passmore conclude, Cremers “makes a compelling case for patient, high active share strategies that persist over time.”
In Volatile Markets
A new survey from Invesco finds that “sovereign wealth funds and central banks are “deepening their commitment to active management” as a result of current market conditions.
The rising concentration of many major indexes, geopolitical fragmentation, and economic and political volatility are the catalysts driving the change in sentiment. In addition, sovereign wealth and central bank investors see an opportunity to improve returns, by taking advantage of market dispersion to capture alpha or to create greater scenario resilience that can limit downside risk.
In brief, as one survey participant put it, “Today’s fragmented investment landscape demands a level of tactical flexibility that market-weighted passive strategies simply cannot provide.”
The shift toward active management is very broad, going beyond security selection in equity and fixed income to overall asset allocation, geographic diversification, and factor exposures. This shift toward a broader definition of active management is one of the most important findings of the survey, the authors note.
