Bond Funds: Why Active Funds Are Best

When it comes to bonds, active management appeals over low-cost passive funds. The reason is simple: lower risk, and with that lower risk, we’ve seen higher returns.

1. The Numbers

Looking at KiwiSaver conservative funds over the past five years:

• Milford Conservative Fund (active): 4.3% p.a. after fees

• Simplicity Conservative Fund (passive): 1.9% p.a. after fees

That is a 2.4% annual difference. Despite charging higher fees, the active fund has delivered more than double the return.

2. Why Active Has the Edge with Bonds

Low-cost bond index funds often hold long-duration bonds. These are more sensitive to interest rate changes and can lose value quickly when rates rise.

Active bond managers can shorten duration, adjust credit quality, and position the portfolio to reduce interest rate risk and preserve capital.

3. Bonds Serve a Different Purpose

With shares, you accept volatility in exchange for growth. Bonds are different. They are usually there to reduce volatility and provide stability in your portfolio.

If your bond fund is more volatile than it needs to be, it is failing its core purpose.

4. What We’ve Seen

In recent years, particularly in periods of rising interest rates, active funds have generally provided lower volatility than passive funds, better capital preservation, and higher returns after fees.

Bottom line:

When the role of bonds is to lower risk, it makes sense to choose funds that actively manage that risk. For bonds, active management has not only reduced volatility but also produced higher returns.