What approach does active management in bond portfolios often seek to achieve?

Active management in bond portfolios aims to exploit opportunities in the market that may allow the portfolio manager to achieve better returns than a passive approach, typically represented by a bond index. The goal of active management includes taking advantage of various factors such as interest rate movements, credit spreads, and changes in yield curves.

By implementing strategies to create larger risk factor mismatches, active managers can position the portfolio in ways that reflect their views on the market environment, such as shifting allocations among various sectors of the bond market, adjusting duration, or choosing bonds based on credit quality forecasts. This can lead to enhanced returns over time if the manager's insights and decisions about these risks prove to be accurate.

This approach highlights the fundamental essence of active management, which is to adopt a dynamic strategy that values flexibility and aims to outperform market indices by strategically tilting exposure away from benchmarks to capture specific bond market inefficiencies.