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Why Fund-of-Funds Managers Are Increasingly Embracing Passive Bond Funds

A quiet revolution is underway in how UK fund-of-fund (FoF) managers allocate to fixed income — and it’s gaining momentum.

Passive bond funds, once dismissed as blunt tools for basic exposure to gilts or credit, are fast becoming staples in FoF portfolios.

Where once they were seen as too rigid to navigate the complexities of bond markets, they’re now viewed as essential components of the modern allocator’s toolkit.

Active bond funds still dominate fixed income allocations – but their grip is loosening.

Data from our research tool, MarketPulse Fund of Funds, shows a clear shift over the past two years. In 2022, active bond funds accounted for 46.4% of FoF fixed-income holdings. Today, that figure has fallen to 38.2%. Over the same period, passive bond ETFs have gained nearly five percentage points to reach 27.4%.

Meanwhile, passive mutual funds remain consistently popular, accounting for 30.2% of fixed-income allocations – a figure that has held steady.

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