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Nir Kaissar

Investors Deserve a Peek at Bond Managers’ Tricks

Grading with benchmarks that better reflect investing styles would be a good start. 

Razzle-dazzle ’em.

Razzle-dazzle ’em.

Photographer: London Express/Hulton Archive/Getty Images

Active bond managers have dazzled investors by outpacing the bond market in recent years. But it’s a simple sleight of hand, and the big reveal is coming.    

The trick is that bond managers have been quietly loading up on low-quality bonds. They pay a higher yield than top-quality ones to compensate for their greater risk of default — in technical parlance, a credit premium.