Passive fixed income misses over 200 fallen angels and rising stars since 2020

 
Investors in passive fixed income funds have missed out on significant growth opportunities over the past five years, driven by increased market volatility, according to analysis by Rathbones Group, one of the UK’s leading wealth and asset management firms. 

Greater geo-political and economic uncertainty worldwide has led to a rise in companies having their credit ratings adjusted by agencies, with rising numbers of credit downgrades (so-called fallen angels) and missed upgrades (so-called rising stars). 

These shifts create opportunities for fixed income investors - but only active managers are positioned to capitalise on them, according to Rathbones Group’s latest analysis*. 

Since 2020 (up to 1 August 2025), there have been 119 fallen angels and 83 rising stars (202 in total). 

2020, marked by Covid-19 disruption, was a standout year for downgrades, with 46 companies affected. 17 of these represented the largest share, followed by firms in the Consumer Discretionary (six) and Communications (four) sectors. 

In contrast, 2024 saw 21 credit upgrades, led by companies in the Financial sector (seven), followed by Industrial and Energy firms (five each). 

In the first seven months of 2025 alone, 13 companies have been downgraded to high yield, while eight have been upgraded to investment grade. 

Source: Rathbones Group. Performance data to 1 August 2025 

Bryn Jones, Head of Fixed Income at Rathbones, says: “The cost of passivity is becoming harder to ignore. In fixed income, passivity comes at a price. Passive bond funds are designed to follow the index, not the fundamentals, meaning investors are often trapped holding downgraded debt - so-called ‘fallen angels’ - for longer than they would like. 

“Active management offers the flexibility to act decisively. We can sidestep deteriorating issuers before the index reacts, capture rising stars early, manage liquidity in volatile markets, and ensure portfolios align with ethical values. In today’s fast-moving credit environment.” 

The structural problem with passive fixed income 

Passive fixed income funds must track an index and typically rebalance only monthly or quarterly. This can result in holding downgraded issuers - fallen angels - for longer than is optimal. Additionally, passive funds are often required to sell fallen angels within a set timeframe, potentially locking in capital losses. 

Conversely, rising stars - companies not yet investment grade but with strong potential - represent growth opportunities that passive funds frequently miss. Passive strategies can only purchase bonds once they enter the index, often after the market has already priced in much of the improvement. 

Rathbones’ analysis suggests that retail investors may focus too heavily on low management fees when selecting passive fixed income funds, overlooking the performance and risk-management advantages of active strategies. 

Active advantages beyond stock picking 

• Liquidity and volatility control – Active managers can adjust exposure and stagger trades to avoid forced buying or selling during index rebalancing, reducing transaction costs and drawdowns in stressed markets. Passive funds have no such discretion.
• Tailored ESG integration - Passive indices may include issuers with weak governance, environmental, or social practices, simply because they meet credit and maturity criteria. Active managers can exclude such issuers proactively.  

Structural limitations of passive fixed income 

Unlike equity indices, which are weighted by market capitalisation, fixed income indices are weighted by the total market value of debt outstanding. This means the most indebted issuers dominate the index, concentrating risk in certain sectors.