The BNY Insight Fixed Income Report showed that advisers want fixed income to fulfil a number of roles in client portfolios. They want it to "reduce overall portfolio volatility" (43%), "protect capital in market downturns" (18%) and “offset equity risk" (16%). Increasingly, they may also need it to generate a reliable income.

Most advisers also prefer active management in their fixed income funds: the research shows 64% of fixed income investments are directed to active strategies. This is a recognition that bond markets contain inherent inefficiencies that skilled managers can exploit, but also that the construction of bond market indices can be problematic. Bond indices are weighted by debt issuance and may therefore reward the most indebted companies and countries.

A dominant 63% of advisers cite "potential for outperformance in less efficient markets" as their primary rationale for choosing active management. Active management can provide essential flexibility to navigate changing interest rate environments - 49% of advisers cite this as a key factor. The ability to adjust duration, sector exposure, and credit quality in response to evolving conditions is seen as critical.

It is particularly important in the current market. Some fixed income certainties have been upended: the ‘safe haven’ characteristics of US Treasuries, for example, or the relative risks of developed and emerging market government debt. Credit spreads are at historic lows. The need for a nuanced and targeted approach has never looked greater.

This all plays into the hands of strategic bond funds, the most flexible and active fixed income option. As it stands, strategic bond funds capture 22% of direct fund allocations. One adviser said: "If you can pick a decent strategic bond fund, it means that the manager is being strategic and if there are changes tomorrow, they are not constrained by only having to buy government debt or short-term debt."

The problem is that this flexibility also creates unpredictability, which may be in conflict with advisers achieving what they need from their fixed income allocations. For example, over one year to October 2025, there is over 22% difference in returns between the top and bottom performing funds in the sector. That extends to 87% over three years. Yields in the sector range from 0% to over 8%[1]. The sector blends truly flexible funds, with funds that focus on short duration, or high yield or government debt. Strategic bond managers vary considerably in the level of risks they take and their goals.

This diversity of approaches was particularly exposed during the 2022 adjustment in interest rates. The resulting market turbulence revealed significant performance dispersion between strategic bond funds that had been obscured during the long bull market in bonds. As one adviser observed: "We've seen cases where one strategic bond fund is down a couple of percent over twelve months while another is up eight percent, and these are large funds from well-known managers that on the surface should be comparable."

These divergent outcomes reflect fundamental strategy differences between funds operating within the same category. Advisers have become more discerning as a result, employing more rigorous due diligence and looking harder at how funds perform in different market environments. Do they have a track record of delivering in different interest rate environments? Do they provide true diversification and a spread of assets?

However, there are still questions over how advisers are selecting strategic bond funds. Advisers rate their ability to evaluate fixed income fund manager skill at just 6.6 out of 10 - the lowest score of any area. The research shows advisers may not have the tools to pick up nuances between strategies. Only 1% of advisers perceive clear and meaningful distinctions between providers' fixed income approaches, with 77% seeing some notable differences (but many similarities) and 22% seeing none at all. This perception of homogeneity can create some nasty surprises in more volatile markets.

More than two-thirds of advisers are looking at performance track record as a selection tool. The post-GFC period was an unusual period for bond markets, with interest rates only normalising in the past three years. A manager that has performed well during that period may not be able to replicate their success in the environment that prevails today, which makes past performance an unreliable guide. Examining consistency of returns may be a better approach, and this is similarly important for many advisers. Risk-adjusted returns are important for around one-third of advisers (more for large firms than small firms), while cost is also an important factor.

It may be that advisers need a larger toolkit to select the right funds to meet their clients’ goals. One discretionary fund manager explained the type of process needed: "We focus on understanding what the fund is designed to do, the specific market conditions where it should outperform or underperform, and how it complements the existing funds¹ in our fixed income sleeve."

Evaluation of strategic bond funds is not easy. Fixed income strategies employ sophisticated techniques - derivatives, duration positioning, yield curve trades, and credit selection - that resist simple categorisation. One adviser admitted it was very difficult to look under the hood: “We rely heavily on system providers and you are then limited by the data they get and how they categorise it."

The providers have an important role here as well. Fixed income strategies - and strategic bond funds in particular - need to become more transparent and outcomes more predictable. Fund groups need to communicate the goals and objectives of each strategy and the type of environment in which they might perform with greater clarity.

Strategic bonds are a vital part of an adviser’s investment toolkit. However, there needs to be better understanding of their objectives to ensure they fulfil their expected role in a portfolio. This requires better processes within advisory firms and better communication on the part of fund managers. That way, strategic bonds can fulfil their full potential. 

¹https://www.trustnet.com/fund/price-performance/o/ia-unit-trusts-and-oeics?sector=O%3ASTERSRT&norisk=true&sortby=P11GBP_D_36M&sortorder=desc&PageSize=25

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