Active management in high-yield bonds is outperforming passive strategies, beating the market in 45% of cases, as investors seek higher returns amid interest rate cuts by the Federal Reserve and the European Central Bank.
Still Fertile Land for Active Managers
With government bonds offering less attractive returns, investors are turning to credit markets—both investment grade and high yield—for opportunities. High-yield bonds, issued by companies with higher default risks, offer higher coupons to compensate. But navigating this complex landscape requires skill, and statistics suggest active managers are up to the challenge.
Over a 10-year horizon, active high-yield managers in euros have beaten their passive counterparts 35% of the time, a figure that jumped to nearly 45% over the past year, according to a recent study by Morningstar. This is a significant advantage, especially considering active equity managers achieve a one-year success rate of less than 30%.
“When a bond is downgraded to high yield it is removed from investment grade indices, which forces passive funds to sell, regardless of price or fundamental outlook,” explain Gary Smith, head of Emea client portfolio management, and Luke Copley, client portfolio manager fixed income at Columbia Threadneedle Investments. Active managers can capitalize on these situations, avoiding forced sales and exploiting market inefficiencies.
How to Invest in It with Funds
The following table, brings together 10 high yield active bond funds sorted by performance since the beginning of 2026. Their average return is 1.4% (with peaks above 4%), which rises to 4.1% on an annual horizon and to 18.7% on a three-year perspective. All with average costs of 0.97%: rather high for the average bond market even if, as already mentioned, in this type of sectors the selection activity of individual issuers (an extra-cost factor) is often decisive.
The High Yield A fund from Janus Henderson has achieved a performance of 1% from the beginning of 2026, reaching 16.9% in three years, with costs of 1%. Tom Ross, global head of high yield, highlights that high yield bonds “offer attractive value in the current market environment, with yields around 6% and a higher quality issuer base, dominated by BB-rated securities.” Default rates remain low, around 1.9%, reflecting solid credit fundamentals.
Ross’s team employs a megatrends approach, “focusing on issuers exposed to long-term secular growth, particularly those aligned with transformative trends such as artificial intelligence, can allow you to seize significant value opportunities.” He favors the BB-B segment for its balance of yield and quality, cautioning that CCC-rated bonds may be “potential yield traps with limited compensation compared to the high risk they incorporate.”
In Europe at a Discount
Jupiter Am’s Global High Yield Bond sub-fund has achieved a performance of 0.9% since January, exceeding 23% in three years, with annual costs of 1%. Fund manager Adam Darling emphasizes that high yield is “fundamentally a value asset class, where valuations based on entry price, yield and spread are determining elements.” This principle, combined with macroeconomic analysis, guides their asset allocation.
Darling notes that pan-European high yield, including the United Kingdom, has historically offered wider spreads than the U.S. market for the same credit quality. This likely reflects investor pessimism about European growth prospects, but also presents opportunities to acquire undervalued European credits. As a result, Darling continues “to be overweight on European credits, despite having started a progressive diversification of the portfolio towards the United States and emerging markets as interesting opportunities arise.”
A Look at Emerging Markets
Emerging markets can offer diversification opportunities within the high yield sector. Strategists at Lombard Odier Investment Managers (Loim) explain that Asian and emerging markets are entering a multi-year phase of ample liquidity, supported by Fed rate cuts, monetary easing, capital reallocation to Asia, the use of Chinese savings, and resilient growth. This liquidity is compressing returns on Asian dollar debt, including high yield, supported by solid corporate fundamentals and attractive spreads compared to local currency markets.
Bank Credit
Attention is also increasing on bank credit within the high yield world. David Benamou of Axiom Alternative Investments points out that since the global financial crisis, banks and insurers have increased their capitalization, liquidity, and regulation, resulting in fundamentally sounder institutions issuing subordinated and lower-rated instruments. However, Benamou prefers to focus on balance sheet metrics rather than ratings, such as Cet 1 coefficients, asset quality trends, and funding diversification. In the financial sector, he concludes, “the position in the capital structure is at least as important as the rating: At 1, Tier 2 and senior non-preferred debt can behave very differently in stressful situations.”
