For numerous reasons, fixed-income assets should be mainly indexed.
The first is performance. Performance measurement studies, such as Morningstar Inc.'s Separate Account/Collective Investment Trust database, are strong evidence that there is little value-added in active management of fixed income. Based on the Morningstar study for periods ended March 31, the difference between first quartile and median in its fixed-income universe is quite small, ranging from 62 basis points for the five years and 51 basis points for the 10-year period. More importantly, the median fixed-income manager loses to the benchmark Barclays Capital Government/Corporate Bond index, underperforming by four basis points for five years and 29 basis points for 10 years. Noteworthy is that these calculations are before fees. After fees, estimated at 25 basis points, even first-quartile or above-average fixed-income management would lose to the benchmark over 10 years.
If you cannot consistently outperform your benchmark index and if your value-added difference is quite small, you should index that asset class.