Passive fixed income investors have missed ‘significant growth opportunities’ over past five years

Written by Jack Gray

24/09/2025

Passive fixed income fund investors have missed out on “significant growth opportunities” over the past five years amid increased market volatility, according to analysis by Rathbones Group.

The wealth and asset manager noted that greater geopolitical and economic uncertainty around the globe had resulted in an increase in companies having their credit ratings adjusted by agencies, with rising numbers of credit downgrades (‘fallen angels’) and missed upgrades (‘rising stars’).

While these movements create opportunities for fixed income investors, only active managers were positioned to capitalise on them, Rathbones stated.

This is due to active management enabling the early identification of fallen angels and rising stars, allowing for proactive risk management and participation in ESG-aligned opportunities.

Between 2020 and 1 August 2025, there were 119 fallen angels and 83 rising stars, for 202 credit rating adjustments in total.

This year to 1 August has already seen 13 companies being downgraded to high yield, while eight have been upgraded to investment grade.

Rathbones noted that, as passive fixed income funds must track an index and typically rebalance monthly or quarterly, investors risk holding downgraded issuers for longer than is optimal.

Furthermore, passive funds are often required to sell fallen angels within a set timeframe, potentially locking in capital losses.

The firm added that companies that were not yet investment grade but had strong potential represented growth opportunities that passive funds frequently miss.

“The cost of passivity is becoming harder to ignore,” said Rathbones head of fixed income, Bryn Jones. “In fixed income, passivity comes at a price.

“Passive bond funds are designed to follow the index, not the fundamentals, meaning investors are often trapped holding downgraded debt - so-called ‘fallen angels’ - for longer than they would like.

“Active management offers the flexibility to act decisively. We can sidestep deteriorating issuers before the index reacts, capture rising stars early, manage liquidity in volatile markets, and ensure portfolios align with ethical values. In today’s fast-moving credit environment.”

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