Mike Reed, Head of Global Financial Institutions, discusses generating strong alpha in the European government bond market, with returns that outperform those of passive strategies and ETFs.
Our opinion is that due to the distinct features of the Euro Government Bond Index there are many opportunities for our active management style to generate strong outperformance relative to both the benchmark and ETFs, even considering the lower fee levels of ETFs.
There are five main factors that we believe offer consistent opportunities:
Benchmark structure: the Euro Government Bond Index is highly concentrated, and France, Germany, Italy and Spain make up 79% of the index weighting (1). This is means that, in practice, the bulk of returns are driven by the price movements in the securities of only four countries.
Politics and Policy: much of the alpha generation is created by a strong understanding of politics and policy and the impact on the spreads that investors demand to invest in a country’s debt at any one time.
Market inefficiencies: bond markets are less efficient than equity markets and more prone to mispricing risk. This can create opportunities for active managers who are better able to understand these risks and how bonds should be priced.
New issue market: as bonds mature and capital recycled, this generates opportunities for active investors who can anticipate publicly available index changes. Active investors can also buy discounted new bonds ahead of index inclusion.
Volatility and price distortion: as active managers we can identify price distortion and position our portfolios either under or overweight to ensure returns are maximised.
(1) Source: Bloomberg, as at 31 August 2025.
