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Chancellor John Healey’s first Budget delivered fiscal discipline and few surprises. For gilt investors, the bigger deal was confirmation that long-dated gilt supply will shrink.
Article last updated 5 November 2026.
Active bond strategies like ours involve a leap of faith. You need to feel comfortable that the active manager you’ve chosen has the potential to do better than the broader market over decent timeframes. But passive bond investing is a bet too: you have to trust that bond market prices accurately reflect all the information that could impact on those prices.
We think that’s a stretch. Bond markets are huge, complex and fragmented so we don’t believe every risk and opportunity is always perfectly reflected in market pricing. A single issuer may have dozens of bonds outstanding, each with different terms and offering very different potential risks and rewards. That creates scope for investors willing to do the digging to identify bonds that may be mispriced. Passive approaches don't set out to do that.
Active by design
Active by design is our alternative: an investment approach that’s active from the top-down and from the bottom-up. Every single bond in our portfolio is there because we’ve made an active decision to own it.
Bond indices and our peer group funds in the IA Sterling Corporate Bond sector give us something to measure ourselves against; they don’t tell us what to buy.
Our approach starts with the big-picture themes that guide where we look for ideas, drills down into individual bonds and is shaped throughout by our ethical framework.
From the big picture to individual bonds
For us, active management isn’t about making a handful of big, one-way bets on what might happen years from now. Instead, we make lots of smaller calls and bring them together in a portfolio where every holding has a clear job to do. It’s how all these calls add up over time that really matters.
We start by looking at bond markets from many angles to develop themes that will generate a wide range of investment ideas. We ask what’s happening to growth and inflation, where interest rates may be heading, which sectors and regions look attractive, where supply and demand dynamics are shifting, and whether regulation and new issuance could be creating opportunities. We look beyond bond markets themselves to get a steer on where conditions may be changing and where stresses might be building elsewhere in the financial system. For example, we’re currently keeping a very close eye on what’s happening in the private credit world as it gets ever-more closely entwined with public debt markets.
Our big-picture themes help us identify where to look, but they don’t dictate what we buy.
Each individual bond in our fund has to stack up on its own merits, offering enough potential reward for the risks we’re taking. This is where our tried-and-tested ‘4Cs Plus’ credit analysis comes in. Once a bond has caught our attention, we dig deeper into the investment case by asking:
- is the management team of the company issuing the bond competent and does it have integrity (character)?
- is the company borrowing within its means (capacity)?
- what are the terms of the loan (covenants)?
- does the company have a safety net if things go wrong (collateral)?
Our 4Cs credit analysis framework
Then there’s the ‘plus’: do we have the conviction to think differently to the broader market?
Next, we score each bond against fair value curves to judge whether we’re being paid enough for the risk we’re taking. Sophisticated valuation techniques help us find bonds that look cheap against comparable opportunities, while analytical tools built within our team complement our fundamental research. We also look at measures such as Sharpe ratios (return per unit of risk) and breakeven duration (spread divided by duration), which feed back into that work. Every idea then goes through a rigorous risk evaluation that sets its position size.
Our ethical framework runs right throughout our investment process. Every issuer whose bonds we consider buying is independently assessed by Greenbank, our ethical, social and impact research team, which has the final say on whether it meets our ethical criteria. Each and every bond must stack up both financially and ethically before it makes it into the fund.
Experience at work
Our active approach has been tested in many market environments, including the Global Financial Crisis in 2008, the eurozone debt crisis in 2011, the COVID-19 shutdown in 2020 and the sharp rise in interest rates during 2022.
Each of these episodes challenged bond investors in different ways so we’ve seen how our process behaves through severe credit stress, liquidity droughts, economic shutdowns, rampant inflation and rapidly rising yields.
That experience matters.
Financial markets rarely throw up the exact same challenge twice, but we believe having a process that’s been put through its paces in lots of very different environments gives us a strong framework to help us identify where the most promising opportunities might lie and, just as importantly, potential trouble-spots to avoid.
Take the current boom in borrowing to pay for the buildout of AI. When this borrowing exploded in late 2025, we were reminded of the late 1990s and early 2000s when huge volumes of telecom debt flooded bond markets. As investor appetite struggled to keep pace with this supply, the telcos’ credit spreads widened sharply and some weaker issuers eventually ran into much more serious difficulties.
Most of today’s hyperscalers are much stronger businesses than the dot-com-era telcos, but we saw echoes of a similar technical supply risk: too much debt, particularly long-dated debt, arriving too quickly for investors to absorb comfortably.
Experience counts when it comes to the nitty-gritty of individual bonds too. Financials (banks and insurers) give us a bigger toolkit than most other sectors. Because they issue debt across their capital structures, ranging from senior to highly subordinated debt, we get multiple ways to invest in the same institution at different levels of risk and reward. That means we can pick our spot in an issuer’s capital structure, rather than simply deciding whether we like a specific bank or insurer overall.
But more choice also means more complexity. Financial bonds often come with intricate terms and conditions, while the regulations governing them continue to evolve. We’ve gained a lot of experience in delving into the small print and spotting which ways the regulatory winds are blowing. We believe that can help us spot opportunities others might miss.
Sometimes that might mean spotting a bond we think an issuer has an incentive to buy back or exchange, potentially offering existing bondholders attractive terms as part of a liability management exercise (LME).
Active in action
Our experience helps shape how we navigate markets, but it’s how we put that experience to work that counts.
Here are just two examples of our active approach in action: how we’re managing interest-rate risk and why we believe there’s a lot to like in the financials sector.
Interest rates are the biggest driver of bond prices so our fund’s duration (its sensitivity to changes in interest rates) is a deliberate choice, not a by-product of any index’s duration. Back in 2022, we were quite significantly underweight duration relative to the iBoxx Sterling Corporate Bond index and the IA Sterling Corporate Bond sector. Things are very different today. Because we’ve extended our duration exposure, mainly by adding to our longer-dated green gilts, we’re now overweight duration relative to the index and the sector.
We think bond investors are pricing in more Bank of England (BoE) rate hikes than will ultimately be delivered, and the technical supply backdrop for long-dated gilts has become more supportive too. Importantly, the significant reset in sovereign bond yields over the past four years means we’re being paid healthy carry (income) while we wait for gilt prices to firm.
When it comes to credit, the financials sector (banks and insurers) ticks a lot of boxes for us. UK and European banks generally benefit from robust balance sheets, while the supply backdrop is supportive too as redemptions and calls are keeping net new banking issuance relatively constrained. In some areas, notably Tier 2 subordinated bank debt, we expect more bonds to be repaid than issued in 2026, meaning net supply could actually be negative.
UK and European insurers also look well placed, given their particularly strong solvency positions. In the UK, specialist insurers are benefiting from the booming pension risk transfer (PRT) market as more corporate defined benefit (DB) pension schemes pass their liabilities on to these firms. Around £50–60 billion of pension liabilities are expected to be transferred over to PRT firms each year over the next decade.
Further consolidation across the financials sector could provide another tailwind. We’ve benefited in the past from owning bank and insurance bonds that performed well following takeover announcements, and we see scope for more mergers and acquisitions (M&A) across UK and European financials in 2027.
When choices matter more
Bond markets have changed dramatically over the past few years. The sizeable reset in yields means bonds once again offer meaningful levels of income, giving investors much more to work with than when yields were super-low.
But bond markets have got more complicated too. Investors are paying much closer attention to huge government borrowing requirements and the supply of long-dated debt, public and private credit markets are becoming increasingly intertwined, and the AI investment boom has unleashed a deluge of new corporate borrowing.
In our view, the combination of higher bond yields and greater complexity makes sharper investment choices increasingly important.
It’s no longer enough simply to decide you want exposure to fixed income. It’s about deciding which interest-rate risks to take, which areas of credit might offer enough reward, where supply could put pressure on prices and which individual bonds might deserve a place in investment portfolios.
That’s where active by design comes in: the freedom to lean into opportunities or step away from risks, anchored by a robust and repeatable investment process. It’s how the Rathbone Ethical Bond Fund steers its own course.
