Why the ‘best’ Swiss bond portfolio isn’t always the top performer

How do you find the best Swiss bond portfolio? The answer might seem straightforward: choose the top performer. 

Yet in practice, the answer is far more nuanced. Performance in fixed income can mean very different things depending on how it is measured, over what horizon and under which constraints. A portfolio that looks strong at first glance may tell a different story once fees, risk budgets and market conditions come into play. And in a market like Switzerland, where short- and medium-term differences in returns can be very small, these subtleties matter even more. 

In this insight, we examine how to define ‘best performance’ in practice – and why portfolios with strong results on paper do not always deliver the most value over time. 

First, define the parameters 

To start with, is the focus on absolute or relative performance? A strong absolute performance may suddenly look weak from a relative perspective. In this discussion, we will focus on relative performance.

Performance must also be measured over a clearly defined time period. The longer the track record, the more reliable the evaluation becomes. It is not only the level of performance that matters, but how consistently it has been achieved.

The longer the performance history, the larger the difference between gross and net results. Comparisons of different investment products typically start with gross performance, since the goal is to evaluate the portfolio manager’s skill. However, costs also must be considered – a portfolio that looks good before costs can quickly lose that advantage when fees are deducted. The difference between gross and net is especially significant in the Swiss bond market, where excess returns are typically measured in tens of basis points rather than percentage points. The expected excess returns (on a gross basis) of Swiss bond portfolios are often clearly below 1% per annum.

The chosen investment strategy is critical 

The selection of the investment universe or benchmark – as well as any investment restrictions – has a significant impact on achievable results. Passive strategies mirror a benchmark’s market risks and should deliver returns close to the index, while active strategies deliberately deviate in an effort to outperform. Critics argue that active management rarely adds value, or that any gains are offset by higher fees. An effective active portfolio must therefore outperform its benchmark after costs.

Active portfolio managers are usually limited by rules that control how much they can deviate from the benchmark. The main objective is generally to limit the amount of active risk. In practice, this is often measured through the tracking error (TE).

Investment products with different TEs are generally classified as follows: 

•     Below 0.5% TE: index-like
•     0.5% to 1%: semi-active
•     Above 1%: active 
   

Of course, it doesn’t make sense to directly compare an index-like portfolio with a highly active one. If the index-like option outperforms, it supports critics of active management. If the active option does better, the question becomes: is it enough to justify the extra risk and potentially higher fees?

Read also: Swiss bonds: how well do you really understand tracking error?

How much outperformance should an active portfolio deliver?

To answer the question, practitioners often rely on the information ratio (IR). This metric relates relative performance to the tracking error (note: both figures are annualised). The IR therefore indicates the risk-adjusted relative performance.

It follows that the expected outperformance before deducting costs should correspond to the product of the IR and the TE.

For example, if the IR is 0.5 and the TE is 1% p.a., an investor can expect an annual outperformance of 0.5% - assuming they have a sufficiently long investment horizon. How much of that excess performance remains depends on the level of fees. 

The IR is useful, but it depends heavily on the market environment. In Swiss fixed income, where yields are low and bonds prices in different market segments often move similarly, short term IRs can look unusually strong simply because TE is tiny. In contrast, during more volatile periods, IR can drop even when the manager is positioned well. 

Investors should, therefore, look at IR across multiple time frames, check whether it holds up in different market conditions and treat very high IRs paired with extremely low TE (below 0.5%) with caution. It’s important to consider whether the alpha is statistically meaningful and whether it still matters after fees. The IR can be helpful, in other words, but it can fool you: too high in quiet markets, too low in turbulent ones. So you need to look at it over time and in context.

The highest IR isn’t always best

While it is true that the highest IR corresponds to the best risk-adjusted performance, the IR alone does not reveal how much return is actually generated in absolute terms. 

For example, consider two actively managed bond portfolios: PF1 and PF2.  The following chart illustrates their performance, benchmarked against the SBI AAA BBB.

FIG 1. Total-return comparison of PF1 and PF2 vs. their benchmark¹ 
 

•  Looking only at the period starting in early 2020, PF2 shows an IR above 1. Despite the Covid pandemic, the war in Ukraine, the collapse of Credit Suisse and further geopolitical tensions – all of which increased market volatility – PF2 exhibits a TE of only around 0.35%, yet still achieves an annual outperformance of 0.38%
   
• Over the same period, PF1 delivers an annual outperformance of 0.96%. However, because its TE is significantly higher at 2.36%, its IR is only 0.38. 

So which portfolio is better? It still comes down to fees, and the level of active risk the manager was meant to take. If typical Swiss bond fees are in the low tens of basis points, PF2’s ~0.38% per year outperformance since 2020 might mostly disappear after fees, even though its IR is above 1. PF1, on the other hand, delivered a higher ~0.96% per year, which leaves more room to stay positive after fees, despite its lower IR of 0.38.

Importantly, PF1 uses a much larger risk budget (TE ~2.36%), which suggests the mandate and manager were intentionally set up to generate meaningful added value. PF2’s very low TE (below 0.5%) raises the question: was it designed to stay close to the index, or did the manager simply not use the available risk budget? For due diligence, investors should check whether the actual TE matches the mandate’s target, and whether the net-of-fee outperformance is statistically meaningful given the level of risk taken.

Read also: Fixed income in 2026: expect a soft landing, but be ready for alternative scenarios

Just take more risk?

Should PF2 just take more risk? Some might argue that a manager with a high IR should simply increase TE to boost returns. But in reality, that’s much harder than it sounds. 

First, many mandates tightly limit active risks – like duration bands, sector and rating exposures, single issuer caps, currency limits or liquidity rules. These restrictions often keep the actual TE far below the stated maximum. Second, the Swiss franc bond market is small, so trying to scale existing positions can run into market depth and turnover constraints. Third, ESG and regulatory requirements can restrict allocations to higher spread or lower rated bonds, reducing the set of opportunities. 

This means you can’t usually double TE by doubling the same trades. You would need new, uncorrelated sources of alpha and a broader toolkit, both of which may be restricted or simply not practical. A portfolio with a high IR but very low TE might show real skill, but still struggle to deliver meaningful outperformance after fees and real world frictions.

Understanding the drivers behind outperformance

While the IR is a good measure of portfolio management skill, it does not directly indicate the actual outperformance generated in practice. For a conclusive assessment, we need to consider fees and recognise that the level of expected outperformance also depends on the manager’s willingness (or ability) to make use of the available risk budget. 

In other words, investors should not only look at the IR, but also analyse the two components it consists of – outperformance and TE – in detail.

These considerations are particularly relevant in the Swiss fixed income market. When searching for the best Swiss bond portfolio, it is essential to ensure that apples are compared with apples. An investment solution marketed as active but with a TE of less than 0.5% is not the same as a truly active solution with a TE 2%. If both solutions are well managed and deliver an IR of 0.5 over the long term, the solution with a 2% tracking error will generate significantly more added value in the long run - and should therefore also be allowed to charge somewhat higher fees.