Key takeaways

• Bond markets can offer greater opportunity for active managers to add value beyond the benchmark than in equity markets.

• By accessing a wider playing field of bond securities that lie outside the benchmark bond universe, active bond fund managers can enhance diversification and generate alpha. 

• Active managers with the right approach can potentially reduce risk exposure to market drawdowns – a key factor for many fixed income investors.

Bond index funds can offer an effective way for many investors to gain broad exposure to global bond markets at a low cost—similar to how equity index funds provide access to global equity markets. But is the Bloomberg Global Aggregate Index (Global Agg) the definitive proxy for global fixed income markets in the same way that broad global equity indices serve as proxies for global stock markets?

In reality, bond markets differ significantly from equity markets, and the rationale for investing in active bond strategies can vary relative to why investors may invest in active equity funds. When it comes to investors’ fixed income allocations, understanding the differences between bond and equity markets helps explain why active bond managers can add value – providing access to a wider playing field of bond securities that could enhance diversification and improve potential returns for investors. 

A vast universe of opportunity

The global investible universe of bonds is much larger, more complex and less efficient than the global universe of stocks. For example, the Global Agg tracks more than 31,000 bond securities in 72 countries¹ – compared with the FTSE All-World Index, a global equity benchmark which tracks around 4,200 equity securities globally².

Bond markets are also more fragmented – they include both government and corporate issuers and their constituents are constantly changing, as older bonds mature and new bonds get issued. Further, while most companies typically issue only a single class of shares, they can issue multiple bonds with different maturities, coupons, credit qualities and payment structures.

The complex nature of bond markets, along with the variety of bond securities being traded, creates a much wider playing field of opportunities for active bond managers to exploit.

Generating alpha for investors

Active bond fund managers can employ a variety of strategies to try and capitalise on these opportunities. For example, they can dig deeper into the capital structures of high-quality sovereign and corporate bond issuers to look for less-traded bonds offering attractive risk-adjusted returns across varying maturities, credit ratings, currencies and other individual bond characteristics.

They can overweight select government bonds issued by countries with improving economic and fiscal conditions which are likely to experience rising bond prices and falling yields. Or, in credit markets, they can add exposure to sectors and individual issuers with improving fundamentals whose credit spreads are likely to tighten from current levels.

This investment flexibility can allow active bond fund managers to potentially add value without adding significantly more risk than a benchmark approach – provided they have the right approach.  

The Vanguard Global Core and Global Strategic Bond Funds are actively managed all-in-one bond strategies designed to be used as the core fixed income allocation in investors’ portfolios – either on their own or alongside other bond strategies.

The funds aim to outperform their benchmarks by taking advantage of market inefficiencies and other alpha-generating opportunities in global bond markets. 

At the same time, the funds are ‘benchmark-aware’ in their risk and return objectives, setting annual alpha targets relative to their benchmark indices alongside clearly signposted guardrails around the amount and types of risk they can take to achieve their target returns.

The Global Core Bond Fund has a more conservative investment mandate than the Global Strategic Bond Fund, which has greater flexibility to invest in a wider range of credit sectors and securities.

Risk mitigation

While the aim of most active bond fund managers is to outperform their benchmarks, what really sets an active bond fund manager apart is their ability to effectively manage risk. This is a key factor for many fixed income investors whose objectives extend beyond just seeking enhanced returns. These objectives can vary from investor to investor, but often include income generation, capital preservation or meeting the investor’s specific financial goals. 

The Vanguard Global Core and Global Strategic Bond Funds can adjust their portfolios in response to changing market and interest rate conditions, potentially mitigating their exposure to drawdown risk and delivering a more consistent return experience for investors.

Additionally, the funds’ global level of diversification can help reduce volatility and enhance returns for investors. By spreading their portfolios across a global range of fixed income securities, markets and economic environments, the funds can help investors avoid being overly exposed to the economic and political events in any single country or region.

All-in-one fixed income portfolios

The managers of the Global Core Bond Fund and the Global Strategic Bond Fund also consider factors like the optimal time for rebalancing, and whether to overweight or underweight certain positions in changing interest rate environments.

They decide daily how to allocate their portfolios based on factors like credit spreads, interest rates and economic news. They work closely with Vanguard’s global team of dedicated credit research analysts, who are continuously monitoring fixed income markets and have deep knowledge of individual sectors, issuers and credit risk exposures. The team assesses potential opportunities as well as potential warning signs – and can take quick action to capitalise on their decisions.

Vanguard’s low-cost advantage in active fixed income

With over $2.6 trillion in assets under management globally, Vanguard is one of the world's largest bond fund managers³. Our global scale, unique mutual ownership structure in the US⁴ and focus on low costs mean we can pass along economies of scale and take a different approach to active fixed income. 

Our commitment to low costs not only allows our investors to keep more of their returns, it also means our fund managers avoid taking excessive risk to offset higher fees. As a result, our active bond funds only assume risk when our investors are adequately compensated.

The result: Better risk-adjusted returns and lower drawdowns during periods of market stress. 42 of our 46 active bond funds globally have delivered better risk-adjusted performance than their peer group averages over the last 10 years⁵.

¹ Source: Bloomberg, as at 25 January 2025. The Global Aggregate Index inclies approximately 31,000 bond constituents.

² Source: LSEG, as at 31 July 2025. The FTSE All-World index includes 4,221 constituents, covering approximately 90-95% of the global equity universe of securities.

³ Source: Vanguard, as at 30 June 2025. Figure represents Vanguard’s Fixed Income Group’s total fixed income assets under management globally.

⁴ The Vanguard Group, Inc. is owned by Vanguard's US-domiciled funds and ETFs. Those funds in turn are owned by their investors.

⁵ Source: LSEG Lipper. Data as at 31 March 2025. The percentage of Vanguard funds globally in each category that outperformed the average return of their peer group of mu¬tual funds. For the 10-year period, 42 of 46 active bond funds outperformed their peer group averages. Results will vary over other time periods. Only funds with a minimum 10-year history were included in the comparison. Not all funds included are available in Europe.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

For further information on risks please see the “Risk Factors” section of the prospectus on our website.

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