How to Approach Global Flexible Bond Funds in an Uncertain Market

In 2024, global flexible bond managers who leaned toward corporate credit, and high-yield bonds in particular, saw robust returns.   

Most global flexible bond managers shied away from large duration moves in 2024, favoring instead relative value strategies across various regions and sectors. While investment-grade bonds—particularly in the United States—lost some appeal due to narrow corporate credit spreads, sector dispersion is expected to continue and create opportunities in the financial sectors over auto and real estate sectors. 

The Global Flexible Bond Landscape Report offers a deep dive into the performance, trends, and risks associated with these funds, equipping you with valuable data for informed decision-making. You can read the full report here: Evaluating Global Flexible Bond Funds.

A global flexible bond is an actively managed investment fund that has the (you guessed it) flexibility to be invested in fixed-income securities across different countries, sectors and currencies. Essentially, it benefits from a wider opportunity set that fund managers can dynamically invest in to capitalize on the greatest possible risk-adjusted opportunities, guided by their market outlooks. 

Morningstar covers 221 global flexible bond funds as of February 19, 2025. Our comprehensive database includes data points and visualizations such as: 

• Fund manager history and average tenure. 

• Fees and expense ratios. 

• The Morningstar Medalist Rating, a forward-looking system that aims to predict funds’ performance versus a relevant benchmark index or peer group. 

• The Morningstar Fixed-Income Style Box, a visual holdings-based representation that classifies bond funds based on interest-rate sensitivity and credit quality. 

The year 2024 proved favorable for global flexible bond funds, as the EAA Global Flexible Bond USD Hedged category outshone the Morningstar Core Bond Index by 2.3%. They posted an average return of 5.5%, with exposure to the higher-yielding segments of the fixed-income spectrum acting as a driving force for several managers. Interestingly, analysts also observed a narrower performance dispersion compared to a recent peak in 2022, indicating more consistent performance across funds. 

The category’s performance was driven by several key factors in the fixed-income markets. Investors had, for instance, entered the year expecting more material rate cuts that failed to materialize as central banks moderated their monetary easing outlook. This led to a surge in government yields which proved challenging for managers positioned for that scenario. Moreover, there was a general appetite for risk assets from investors which supported high-yield bonds, with the Morningstar Global High-Yield Bond Index reporting returns of over 8% on a USD basis. 

Global flexible bond funds also attracted EUR 19 billion in 2024, in a reversal of outflows seen during 2022 and 2023. Funds in the sector experiencing the largest inflows included DNCA Invest Alpha Bonds, Schroder ISF Global Credit Income, Vontobel TwentyFour Strategic Income, and Algebris Global Credit Opportunities, among others.  

Against a backdrop of tightening valuations across the corporate credit spectrum, managers also shifted toward European credit over US credit based on more favorable valuations coupled with a higher likelihood for interest-rate cuts.  

Financials continued to perform strongly in 2024, with solid returns from subordinated bonds, a type of debt instrument that ranks below other forms of debt in terms of claims on a company’s assets or earnings. Subordinated bonds are deemed riskier than senior bonds but typically offer higher yields.  

Our analysts also observed hopeful signs of recovery in real estate bonds, a sector that has faced headwinds in recent years, with managers showing a preference for logistics and data centers over traditional office and retail names. Conversely, the automotive sector faced challenges including, among others, falling sales and competition to both European and US auto companies from Chinese electric vehicle manufacturers. This led to a widening in spreads during the second half of 2024. 

Our future outlook for global flexible bond funds is more cautious. Challenges are expected in generating alpha next year given the uncertain outlook for interest rates and inflation, alongside tighter credit spreads.  

While global flexible bond funds promise flexibility, their wide leeway makes such funds difficult to use in the context of a broader portfolio: by definition, the risk profile of a global flexible bond fund can change rapidly. It is essential therefore for investors to arm themselves with patience and adopt a long-term investment horizon, as such funds may occasionally experience bouts of spectacular underperformance but can also record astounding rebounds over shorter time frames. 

Investors should get the answers to certain questions before taking the plunge into flexible bond investing. Those questions include: 

1. How much experience do these teams have in successfully managing and executing a flexible strategy over full bond market cycles?  

2. What is their strategy? Does it combine top-down plays with more bottom-up, relative value trades? Relying heavily on top-down calls can make these investments especially vulnerable. A balance between both is often better. 

3. Does the investment team have appropriate experience using derivatives, and are its risk management systems robust enough to monitor and stress-test these derivative exposures? 

4. What is a fair price to pay for the expected value-add compared to low-cost passive options?  

Equipped with these insights, you are ready to make well-informed decisions and pivot confidently in your investment strategy execution. 

Morningstar Direct empowers asset and wealth managers to build and manage their assets with the help of robust data analytics. Our unique blend of data, research, and ratings service supports your market research, product creation, and portfolio management decisions. Our global dataset, one of the broadest in the industry, not only facilitates effective analysis but also builds trust with your clients.