fixed income | february 22, 2024
Our fixed income funds added value versus comparable passive funds
Our active management approach benefited clients over the long term.
Key Insights
Our research shows that, over the past 20 years, T. Rowe Price’s fixed income funds outperformed comparable passive funds over various rolling periods.
Relative to comparable passive funds, our fixed income funds also exposed investors to less volatility.
The analysis includes fees and expenses to provide a clear picture of performance and highlight the value added by our active management approach.
Our research shows that, over the past 20 years, T. Rowe Price’s fixed income funds outperformed comparable passive funds over various time frames while exposing investors to less volatility. This relative strength was especially pronounced over longer rolling periods.
Through the market’s ups and downs, we have remained committed to our investing approach, which focuses on our rigorous research and experienced risk management.
Stronger historical returns with less volatility
Fixed income funds play several important roles in client portfolios, including diversification from equities and income generation. Accordingly, the opportunity for active managers to add relative value often hinges on their success in mitigating the risk of downside volatility. Figure 1 shows that, relative to comparable passive funds, the T. Rowe Price fixed income funds in our study1 delivered stronger average returns and less volatility (see Historical Volatility box below) over rolling 10-year periods. A lack of sufficient performance history for passive funds in some Morningstar categories meant that fewer T. Rowe Price funds could be evaluated over the 10-year rolling time frame as compared with the shorter time frames in our analysis. However, our fixed income funds’ relative strength and less volatile return stream also extended to the rolling one-, three-, and five-year frames.1
Subscribe to T. Rowe Price Insights
Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.
Why now is the right time to review your portfolio.
Market uncertainty, major life events, and the rising cost of living can impact your investment strategy.
Get a free portfolio review:
Over 10-year rolling periods, the frequency with which our fixed income funds outperformed or exhibited less volatility than comparable passive funds stood out. (See Figure 1 and Active success rates box below.) T. Rowe Price’s fixed income funds also posted better average annualized returns or average historical volatility than comparable passive funds in a majority of one-, three-, and five-year time frames.
Our fixed income funds outperformed comparable passive funds and exhibited less volatility*
(Fig. 1) 10-year periods, rolled monthly, from January 1, 2004, to December 31, 2023
View standardized returns and other information about the funds in this analysis (PDF). View more information on the methodology of this analysis (PDF). Past performance is no guarantee of future results.
Sources: T. Rowe Price and Morningstar (see Additional Disclosure).
* Analysis by T. Rowe Price. Comparable passive funds are (1) mutual funds and exchange-traded funds (ETFs) classified as “index fund” in the Morningstar Direct database and (2) in the same Morningstar category as the T. Rowe Price active funds being analyzed. The performance of the T. Rowe Price active funds was compared against the comparable passive funds using 10-year rolling monthly periods from January 1, 2004, to December 31, 2023. The analysis was conducted at the Morningstar category level and included all open-end funds and ETFs within U.S. Morningstar categories where passive funds are present. The oldest share class returns are used for analysis.
0.14%
is the average annualized excess return (net of fees and expenses) posted by our fixed income funds across rolling 10-year periods.
Our funds averaged 0.30% less volatility, annualized, than comparable passive funds.
Active success rates
The active success rate records the percentage of times an actively managed T. Rowe Price fund’s returns beat or exhibited less volatility than its passive peer group, net of fees and expenses, over a specified period.
Excess returns
For each rolling period, the passive returns average was subtracted from each T. Rowe Price fund’s return, yielding an excess return.
The T. Rowe Price difference
We’re deeply committed to seeing clients achieve their long-term goals, aiming for better returns over many market cycles.
We’ve managed investments through all kinds of markets, and our professionals average 23 years in the industry and 17 years with T. Rowe Price.2 We know that identifying risks is as important to identifying opportunities.
More than 525 of our investment professionals3 go out in the field to uncover opportunities. They study them firsthand. And use those insights to help give our clients an investment edge.
The T. Rowe Price active management approach has made a difference for clients, especially over longer time horizons. Even after fees and expenses, our fixed income funds delivered more return, more often, and with less volatility than comparable passive funds.
Historical volatility
Historical volatility (based on standard deviation) measures the dispersion of a fund’s returns. Funds that exhibited lower volatility experienced less fluctuation in their returns.
Tracking Error
In simple terms, tracking error refers to the difference in a fund’s performance relative to the returns posted by its benchmark.
Actively managed funds deliberately seek a positive tracking error in an effort to generate returns in excess of the benchmark.
Passive mutual funds are designed to track the performance of a benchmark, but for a variety of reasons, there can be discrepancies.
The potential for active risk in passive fixed income funds
Passive funds have become increasingly popular over the past two decades. A big part of their appeal typically lies in the prospect of generating a market-like return, often at a lower cost than actively managed strategies. Given the liquidity in the equity market, passive funds in this asset class usually exhibit little tracking error (volatility in a fund’s returns relative to those generated by its benchmark).
However, compared with passive equity funds, tracking error can be more pronounced for passive fixed income funds. (See Figure 2.) What is the source of this tracking error? The nuances of the bond and credit markets can mean that passive fixed income funds may struggle to mirror the composition of the conventional bond index they track. These differences can lead to variations in performance, possibly contributing to a passive fixed income fund’s overall volatility.
Passive fixed income funds exhibited higher tracking error than equity peers1
(Fig. 2) Average annualized tracking error for five largest passive funds in fixed income and equity categories with the most passive assets2
As of December 31, 2023.
We define a passive fund as one identified as an “index fund” in the Morningstar Direct database.
Sources: T. Rowe Price and Morningstar. All data analysis by T. Rowe Price.
1Tracking error calculations are relative to the prospectus benchmark for each passive fund.
2As of December 31, 2023, Morningstar’s large blend category had the highest level of passive assets, amounting to about 50% of all passive equity assets. The 5 biggest large blend index funds by market capitalization made up 72% of passive assets in the category. Morningstar’s intermediate core bond category had the highest level of passive assets, amounting to about 38% of all passive fixed income assets. The 5 largest intermediate core bond index funds made up 83% of passive assets in the category. © 2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Past performance is no guarantee of future results.
Specific bond issues may be unavailable in the desired size, and each substitution involves some difference in quality, duration,4 and other risk factors. Conventional bond benchmarks also tend to experience significantly higher turnover than equity indexes, driven by issuance levels, maturities, early redemptions, credit rating changes, and other factors.
The potential differences in composition between a passive fixed income fund and its target index, along with transaction costs and cash flow disparities, might lead to volatility in the fund’s returns relative to those generated by its benchmark.
We believe that potential tracking error is an important factor for investors considering a passive fixed income fund, especially investors expecting a market-like return.
Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.
To provide a clear picture of our performance, we take fund fees and expenses into account when we report returns and volatility.
Past performance is no guarantee of future results. All investments are subject to risk, including the possible loss of principal. Results from other time periods may differ. Active investing may have higher costs than passive investing and may underperform the broad market or comparable passive funds with similar objectives. Passive investing may lag the performance of actively managed peers as holdings are not reallocated based on changes in market conditions or outlooks on specific securities.
1The study spanned the 20 years up to the end of December 2023 for older funds, or since inception for newer ones, and measured performance and historical volatility net of fees and expenses. We used the oldest share class for each fund. Each T. Rowe Price fund’s performance was measured against the equally weighted average of the returns (passive returns average) and historical volatility (passive volatility average) posted by the oldest share class of the index funds in its Morningstar category. These comparisons were made over 1-, 3-, 5-, and 10-year horizons, rolled monthly.
2As of December 31, 2023.
3As of December 31, 2023. Investment staff includes 138 portfolio managers, 26 associate portfolio managers, 196 investment analysts, 60 associate analysts, 42 specialty analysts, 35 traders, 13 strategists, and 21 senior managers.
4Duration measures a bond’s sensitivity to changes in interest rates.
Additional Disclosure
©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of February 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
Risks: All investments are subject to risk, including the possible loss of principal. Bond yield and share price will vary with interest rate changes. If interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short term. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates; differences in market structure and liquidity; as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types; advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
202402-3418303
Next Steps
Explore T. Rowe Price bond funds.
Contact a Financial Consultant at 1-800-401-1819.