UK investors are risking potentially significant underperformance by following the growing switch to passive fixed income funds rather than taking an actively managed approach to fixed income, according to Rathbones Group.
A study by the wealth manager raised concerns that retail investors may often not understand key issues with passive fixed income funds and instead focus too much on lower management costs rather than performance.
Data from Rathbones shows that its actively managed Ethical Bond Fund has outperformed fixed income holdings in well-known passive funds by more than 10% over the past five years. There is an even greater difference over the past 10 years, with growth over a third higher in the same actively managed fund than bonds in popular passive funds.
However, Rathbones data for the whole UK market shows active fixed income funds across all sectors saw outflows of £15.87 billion from 1 January 2022 to 31 March 2025, while passive funds achieved inflows of £14.29 billion.
The first quarter of this year has seen outflows of £1.987 billion from active fixed income funds while passive funds have achieved inflows of £878.33 million. Despite this, gross sales for active funds were higher than for passive at £9.948 billion compared with £5.780 billion in the same period.
Bryn Jones, head of fixed income at Rathbones Group, said: “Assets under management in passive fixed income funds have held up despite there being significant underperformance in general and the significant difference in flows recently is really striking.
“Too many clients are focussing on price when they select fixed income funds, with the result that they opt for underperformance while not fully understanding the option they are taking.
“There is too little consideration given by the industry in general to the switch to passives in the fixed income sector and the reality is that it is not always a good investment outcome for clients.”
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