Investors could be risking potentially significant underperformance by following the growing switch to passive fixed income funds rather than taking an actively managed approach, Rathbones Group has argued.

The wealth management firm warned that 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 showed that its actively managed Ethical Bond Fund had outperformed fixed income holdings in ‘well-known’ passive funds by more than 10 per cent over the past five years.

Meanwhile, over the past 10 years, growth was over a third higher in the same actively managed fund than bonds in popular passive funds.

However, Rathbones’ analysis highlighted that active fixed income funds across all sectors saw outflows of £15.87bn between 1 January 2022 and 31 March 2025, while passive funds achieved inflows of £14.29bn over the same period.

The first quarter of this year has seen outflows of £1.99bn from active fixed income funds, while passive funds experienced inflows of £878.33m.

Despite this, gross sales for active funds were higher than for passive at £9.95bn compared with £5.78bn in the same period.

“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,” said Rathbones Group head of fixed income, Bryn Jones.

“Too many clients are focusing 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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