Over the last month or so, seemingly every other article in the financial press has found some way to crowbar in a tenuous reference to football – and we briefly toyed with doing the same.
Something along the lines of equities as the flashy centre-forward grabbing all the headlines; gilts as the ageing, unreliable midfielder – permanently under pressure and lacking any vision; and short-duration bonds as the goalkeeper, whose main job is standing still and hoping nothing happens. We considered it. We decided against it. Mostly out of mercy.
Instead, we offer a better way to mark the time of year: a school report card. Which, in fairness, is exactly the same trick, only wearing a different uniform. We say we will not shoehorn the investment universe into a laboured conceit, then spend the next 1,800 words doing precisely that with exercise books instead of football boots.
No apologies. It works better. Because if you sat the whole ‘lower risk’ investment universe down at a desk for six months and graded the homework, you would end up with two very different classes.
One class all sat at the front, did exactly as asked, caused no trouble and handed in work indistinguishable from the kid next to them. The other class was messier. A few genuine troublemakers, a couple who clearly did not do the reading – and, tucked in among them, some properly gifted pupils who did brilliantly because they were actually made to think for themselves.
The first class is bonds, led by Mr Lacklustre, the ageing teacher stuck in his ways with an unexciting style. The second is absolute return, taught by the impressive Mr Maverick, who lets his kids think for themselves and focus on their areas of expertise. Only class is actually learning anything.
Word in the staff room, incidentally, is that Mr Lacklustre has taken quite a shine to Miss Inflation, the notorious troublemaker two doors down. Given his track record of handling anything remotely difficult, this is not a romance anyone should be rooting for.
Attendance: Excellent. Effort: Not Required
Anyway, let’s start with the front row. Over the first six months of 2026, the IA Sterling Corporate Bond sector delivered a median return of 1.13% (Source: FE Analytics). The best fund managed 2.69%. The worst lost 0.48%. Top to bottom, the entire sector – every manager, every process, every research team – spans about three percentage points. Three points. That is not a spread of outcomes. It is a rounding error dressed up as an industry.
Ask yourself what you are actually paying for there. If every fund in a sector produces nearly identical results regardless of who is running it, the manager is not adding anything a spreadsheet couldn’t. You could replace the entire sector with a low-cost short-duration tracker and nobody, including the people currently paying active fees for it, would notice the difference in their statements.
To be clear, this is not a criticism of the individuals involved. Plenty of talented people work in fixed income. It is, though, a criticism of what the asset class currently allows them to do, which is precisely nothing. When every fund is riding the same rates and the same spreads, there is no meaningful decision left to make. Sit still, keep duration short, keep costs down, hand in homework identical to the desk next to you. ‘Must try harder is not really fair in this context – there is no ‘harder’ to try.
Show your working
Now the other class. Over the same six months, the IA Targeted Absolute Return sector’s best fund returned more than 17% while its worst lost more than 9%. That is a spread of roughly 26 percentage points, not three.
Of course, the instinctive reaction is to see that range and panic. Nine percent losses! Wild swings! How can anyone recommend that? But flip the logic round. A 26-point spread means something is actually happening. Different managers are making different calls, backing different theses and themes and living or dying by whether those calls were right. This is what a subject with actual content looks like. Some pupils excel. Some struggle. The grades mean something because the test was not identical for everyone.
Despite housing a fund that lost nearly a tenth of its value, the sector average for the half year came in at 2.49% – more than double what the well-behaved, do-nothing bond sector managed. Roughly three in four absolute return funds beat the median corporate bond return outright. Pick a name at random from that messier, more troublesome class and the odds were heavily in your favour. And that is not despite the dispersion – it is because of it.
“If you want a subject where fund-picking matters – where due-diligence and manager research earn their fee – you need one with a real spread of outcomes.
What a real class looks like
Here is the bit that gets missed constantly: a sector where everyone gets roughly the same mark is not a safer sector – it is an undifferentiated one. Every bond fund got a B- because every bond fund was handed the same worksheet and told not to deviate. There was never any prospect of a standout result – good or bad – because the whole subject is designed to prevent one.
Absolute return’s report card has some genuinely poor grades on it but it also has some outstanding ones. That variance is the entire point of having a class where selection and skill can actually show up in the results.
If you want a subject where fund-picking matters – where due-diligence and manager research earn their fee – you need one with a real spread of outcomes. You cannot generate alpha in a room where nobody’s allowed to think differently from the person next to them.
Five years of reports, not one term
Of course, one good half does not make a case on its own, so let’s look at the five-year data (to 30 June 2026). The IA Targeted Absolute Return sector delivered an annualised 4.28%, with a maximum drawdown, across the whole period, of just 2.77% (Source: FE Analytics).
Admittedly, there is no way simply to buy the sector as a whole – but that is precisely why we have always advocated a highly diversified spread of absolute return funds, to create that smoothing effect and limit the damage on the occasions a fund switches overnight from genius to unruly kid.
Plus the underlying premise holds regardless. Look at absolute return as a genuine asset class in its own right, rather than through the lazy ‘they’re all the same’ lens, and the case for including it becomes hard to argue with. It is not the problem child most investors still assume it is.
Over the same five-year period, the IA Sterling Corporate Bond sector delivered 0.32% annualised. That is a lot of work for very little return and little to cheer about for the underlying investors – especially set against cash, given the Bank of England Base Rate returned 3.47% annualised over the same five years.
A bond sector that cannot beat cash over five years is not a subject anyone should be getting a passing grade in.”
Corporate bonds, run by active managers charging active fees, delivered less than a tenth of what a savings account paid for doing absolutely nothing. Maximum drawdown: 21.92%, for the privilege. Gilts did worse still, -4.2% annualised with a drawdown of 28.87%, comfortably behind cash in the other direction. The Bloomberg Global Aggregate, everyone’s default global bond proxy, managed -1.55% annualised with a drawdown of 22.7%, also well short of cash.
These five-year numbers are simply startling. Investors and fund selectors remain wedded to an asset class that is going nowhere – one whose outlook has arguably deteriorated since the start of the year, with inflation ticking back up and interest rates refusing to follow the downward path everyone expected (read: ‘hoped for’).
A bond sector that cannot beat cash over five years is not a subject anyone should be getting a passing grade in. It means the risk taken – and the fee charged for taking it – delivered less than doing nothing at all. If a pupil handed in five years of work that underperformed simply staying at home, you would not call them steady – you’d call the head of department.
Ten years, two detentions (one, really)
Sceptics will say five years is skewed by 2022. Fine, go back further. Across the 10 discrete calendar years from 2016 to 2025, the IA Targeted Absolute Return sector posted a negative year on two occasions, a modest 2.81% dip in 2018 and a flat, essentially rounding-error, 0.37% in 2022 (Source: FE Analytics). Call it two detentions in a decade, one of which barely registers.
Compare that with other performances in the year in question. 2022 was the year gilts fell 23.87% and the Bloomberg Global Aggregate fell 16.25%, the worst year on record for the ‘safe and dependable’ asset class. Absolute return, in the same 12 months, was essentially flat. That is not a rival storyline. It’s barely even a footnote beneath it.
And the gap holds up even once you average across every bad year each asset class has had. On its two down years, absolute return lost an average of 1.59%. Gilts, across their three down years, lost an average of 10.99% – nearly seven times as much. The Bloomberg Global Aggregate, across four down years, averaged a 5.96% loss – almost four times as much. It is not just that bonds get sent to detention more often. When they do go, they go considerably harder.
One pupil is not a class
The other common error worth addressing directly is judging absolute return by a single fund and then drawing conclusions about the whole subject. Nobody assesses an entire school year group by picking one pupil at random and extrapolating. You look at the class, the spread, the average, the consistency over multiple terms.
Prospect theory teaches us investors feel losses far more acutely than equivalent gains, and I have some sympathy with that instinct. See the label ‘absolute return’ next to a 9% loss over six months and the emotional reaction lands before the analytical one gets a look in.
Yet as we have discussed many times, the answer is not to fixate on the individual. Build a diversified team of managers, each with their own idiosyncrasies, and those idiosyncrasies contribute to and offset each other over time. That is the real strength of this asset class – and the key to using it properly. Patience and diversity win. Reading one bad headline number and running scared back into the meagre returns of short-duration bonds does not.
Price is what you pay. Return, adjusted for the risk and the fee, is what you get. Bonds have been failing that test for years.”
Held individually, the fund that lost 9% this half-year looks like a disaster and a reason to avoid the whole category. Held as one name within a properly diversified spread across genuinely different strategies, that same fund is simply one data point offset by others making entirely different calls for entirely different reasons.
That is not a weakness to manage around – it is the mechanism that delivers the 2.61% average in the first place, and with genuine manager selection rather than a random pick, there is a reasonable case for doing considerably better than average.
The usual objection at this point is fees – and it is worth answering honestly rather than waving away. Absolute return costs more than a passive bond tracker. That is true.
Equally, a corporate bond fund charging an active management fee to underperform cash, with a 22% drawdown along the way, is expensive for what it delivered – which was less than a savings account would have handed you, for free, with no fund manager involved at all. Price is what you pay. Return, adjusted for the risk and the fee, is what you get. Bonds have been failing that test for years, quietly, while getting marked as though they had passed.
Inertia wearing caution as a disguise
Here is the number that should actually embarrass the industry. As of the end of June 2026, Citywire MPS Monitor puts alternative UCITS at roughly 3.5% of MPS allocations versus 42.8% in bonds in a low/moderate risk portfolio – 3.5%, after a decade in which the sector comfortably beat cash, produced a drawdown roughly an eighth the size of corporate bonds’ worst period, and shrugged off the worst year bonds have ever had while barely blinking, all while corporate bonds themselves could not even keep pace with a savings account.
That is not caution. That is inertia wearing caution as a disguise. The excuses used to make sense a decade ago – opaque strategies, illiquid structures, high minimums, genuine concern about single-manager blow-ups. UCITS solved most of that. Daily liquidity, full transparency, proper regulatory oversight. It is just that the excuses were not updated along with the product.
If your client’s portfolio carries a 3% allocation to absolute return, and even that 3% sits in a single fund, ask yourself honestly what you are actually protecting them from. Volatility to be explained at a review meeting, or genuine risk of loss? Because, on the numbers, the class you have been avoiding – and under-diversifying even on the rare occasion you do use it – has spent the last decade outperforming the one you have been defaulting to, and doing it with less pain along the way.
‘Must try harder’ is the classic school report line – but it only means something if trying harder would actually change the result.”
Bonds will keep getting full marks for attendance. And they have earned it – in the narrow sense that showing up and doing nothing is exactly what is been asked of them. But a report card that says nothing except ‘present’ is not one worth building a portfolio around. The other class had a rockier year in places. It also had the pupils actually worth watching.
‘Must try harder’ is the classic school report line – but it only means something if trying harder would actually change the result. Tell a bond fund to try harder and there is nothing left for it to do differently as every manager in the sector is stuck riding the same rates and the same spreads, whatever the effort put in.
Tell an absolute return manager to try harder, however, and it is a completely different conversation because skill, selection and genuine differentiation are the entire mechanism by which that sector produces a result at all.
One class cannot improve no matter what it does. The other improves precisely in proportion to how much work you put in choosing who is in it.
Ian Willings is a portfolio manager and partner at Apollo Multi Asset Management, experts in researching and investing in absolute return and liquid alternative strategies. CIO, Steve Brann, is the author of Absolute Vision, a book that sets out the thinking behind the firm’s strategy and looks to demystify the asset class for a wider audience. For a free copy, please contact info@apollomam.co.uk
