Global flexible bond managers who embraced corporate credit and high-yield bonds saw strong returns in 2024, according to Morningstar’s data.
Despite tight credit spreads, investment-grade bonds—particularly in the US—became less attractive, leading managers to seek value elsewhere.
The report has highlighted that managers who outperformed did so by taking a dynamic approach, capitalising on relative value opportunities across sectors, regions, and maturities rather than making large duration bets. Popular strategies included US agency mortgage-backed securities, which provided a compelling alternative amid shifting market conditions.
One of the biggest winners in terms of investor demand was Pimco GIS Income, which attracted the most inflows, particularly from European and Asian investors seeking high income with moderate credit risk. This underscores the continued appeal of flexible, actively managed bond strategies in a changing interest rate environment, according to Morningstar.
As corporate credit spreads tightened to multi-year lows, many managers expressed scepticism about the attractiveness of investment-grade bonds, especially in the US market. However, dispersion across corporate sectors is expected to persist, with managers seeing opportunities in financials, while sectors such as autos and real estate continue to face structural challenges.
Investors reduce risk, favour equities over bonds
“Choosing a global flexible bond fund calls for a careful assessment of several factors, including the investment team’s expertise, their track record across market cycles, and their ability to balance top-down and bottom-up considerations,” shared the analysts.
Giovanni Cafaro, manager research analyst, Morningstar, added: “Global flexible bond funds fared well on average during 2024. Their performance was largely supported by investors’ strong risk appetite, which resulted in credit, and high-yield bonds in particular, outperforming against the backdrop of a broad narrowing in spreads and a more uncertain outlook for rates.
Looking ahead, the managers’ outlooks remain cautious. Dispersion across corporate sectors is expected to remain, as many managers argue there is still value in financials, while challenged sectors like autos may face durable headwinds.
Investors in global flexible bond funds should be patient, as the nature of these strategies can lead to both significant underperformance and impressive rebounds over short timeframes. This boom-or-bust pattern requires a strong stomach, therefore, they should be considered in the context of a long-term investment horizon.”
