There's a version of the investment conversation that goes something like this: “equities for growth, alternatives for excitement, and bonds left over for investors who've already won (and are now just trying not to lose).” I think that’s a pretty outdated way to regard fixed income exposure; I also think it’s increasingly expensive to hold that POV too. In our view, it’s simply too big a risk to treat fixed income as an afternought… both in terms of after-tax earning potential as well as portfolio diversification.
Bonds do something most equities don’t
They pay income while the portfolio grows. They can hold their value when other asset classes are in freefall, providing a ballast against equities. And in the tax-sensitive context that describes most advisors' clients, well-structured fixed income can deliver competitive after-tax income.
Consider the math at today's yields:
With core inflation still running at 3.2% and the Federal Reserve on hold, investment-grade corporate and municipal bonds are currently offering investors a positive real rate of return (nominal yield minus inflation). For a high-bracket client, those nominal yields are doing far more work than they appear to.
For example, as of March 30, 2026 a 2.8% AA-rated municipal bond carries a tax-equivalent yield of roughly 4.4% for a client in the 37% federal bracket, (and goes even higher for high tax states).
On balance, a 4.4% return won’t beat the long-run pre-tax average of the S&P (which is ~10%). But when you factor in a high-bracket investor paying 23.8% on qualified dividends and long-term capital gains (the 20% top rate plus the 3.8% net investment income tax surcharge), the after-tax return on a buy-and-hold equity position has historically run closer to 7-8%... but that’s only if clients buy and hold long enough to enjoy that average. A 4.4% tax-equivalent yield (with materially lower volatility) does meaningful work as part of a diversified portfolio.
But there are extended stretches when bonds simply outperform equities outright. The Bloomberg US Aggregate Bond Index returned 6.3% annualized from 2000-2009 against the S&P's -0.95%. It's not a coincidence that the period bookended by the dot-com crash and the financial crisis ended with bonds well ahead of stocks.
When equity returns get pulled forward, as they have over the past several years, the case for fixed income strengthens.
None of this is an argument against owning equities. It's an argument that the fixed income allocation in a portfolio is doing more income work than most advisors give it credit for… and at today's yields, especially after tax, it doesn't need to deliver equity-like total returns to be a meaningful contributor to a client's outcomes.
That said, the two most significant risks in any fixed income portfolio are duration risk (how sensitive the portfolio is to changes in interest rates) and credit risk (the possibility that a borrower cannot repay). Understanding and managing both is central to building an allocation that actually does its job. How to build it thoughtfully is the real work… calibrating around each client's time horizon, tax situation, cash flow needs, and tolerance for price volatility.
Which means the question of who manages a client's fixed income becomes just as important as whether they hold bonds at all.
Where scale runs into trouble
There's often an assumption in this industry that bigger is safer… that a large firm with a household name and billions under management must be doing something a smaller shop cannot. In some asset classes, scale is genuinely an advantage. In fixed income, and especially in investment-grade bonds, it can work against the client in our opinion.
Going with a bigger firm has its advantages, but it can also leave many advisors feeling like a drop in the bucket. When an account is one of thousands being managed to a model, the work can often feel like model administration. The specific things that should be driving bond selection (a client's tax situation, cash flow needs, state of residence, risk tolerance) can get averaged away.
I believe fixed income is too personal to be managed generically.
Separately managed accounts change the equation
One of the more important shifts in fixed income over the past decade has been the growth of separately managed accounts, which have moved from roughly 3% of the total municipal market to about 23% in that span (according to Bloomberg). When a client owns individual bonds directly (rather than shares of a fund), they hold the income stream and the tax control that comes with it (and they're insulated from the forced selling that mutual funds have to execute when other investors redeem).
In our view, portfolios should be built around the individual client.
What boutique active management delivers
In an environment where market dispersion is widening (where the difference between the best and worst credits in a sector keeps growing), being selective starts to carry greater weight. A passive index might own the entire market without distinction, while an active manager chooses what to hold and what to avoid. Holding an index in the bond market usually means holding the most prolific issuer of debt, not necessarily the best credit. We feel that that distinction has taken on added significance of late, when some municipal sectors (hospital systems and certain higher education credits, in particular) are facing genuine headwinds… while essential service revenue bonds and well-run state general obligations remain structurally sound.
Bonds can be a portfolio’s ballast, keeping it safe and afloat when conditions turn. In a market defined by Fed uncertainty and widening credit dispersion, our view is that fixed income management matters more than it has in a long time.
We believe clients need fixed income. The question worth asking is whether the firm managing it knows them well enough to do it right.
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