Rethinking income

Why active management matters in today’s markets 

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Article Type
BondTalk
Topics
Long-Term Outlook, Opinion
Published
March 25, 2026
Read time
6 mins
Author
Rory Sandilands
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AI investment by the world’s largest technology companies is reshaping capital markets and driving a surge in corporate borrowing. As indices adjust, passive income strategies may result in unintended market exposures rather than the best long-term opportunities, strengthening the argument for active management.

 

AI investment is reshaping markets

 

The world’s largest technology companies are investing on an unprecedented scale in AI infrastructure. Between them, Alphabet, Amazon, Meta Platforms, Microsoft and Oracle plan to spend $684bn in 2026 and $775bn in 2027 on data centres, cloud expansion and AI development.

 

Currently, these five hyperscalers make up about 3.5% of the Bloomberg US Investment Grade Corporate Index, while the tech sector as a whole accounts for 8%1. Some, including Oracle, are already among the largest issuers in the index, and continued borrowing could push more of them into the top 10, increasing concentration risk for passive investors.

 

This trend could accelerate significantly from here. JPMorgan estimates that $1.5 trillion of AI-related infrastructure will be needed over the next five years, with up to half of this financed through bond markets. That implies roughly $300bn of annual debt issuance, which will significantly reshape corporate bond indices.

 

Alphabet shakes up the sterling market

 

In February 2026, Alphabet, Google’s parent company, shook up the sterling market by issuing a £5.5bn multi-tranche sterling bond, the largest corporate deal ever in the UK. The bonds now account for 1.4% of the Bloomberg Sterling Corporate Index2, immediately making Alphabet one of the largest non-financial issuers in the benchmark, behind only major banks such as HSBC and Barclays.

 

The size and structure of the deal had an impact on the index’s duration, extending it beyond what is typically observed in a standard monthly move. This effect was driven primarily by the inclusion of a long‑dated tranche, highlighting how a single corporate deal can materially influence index characteristics.

 

The problem with passive

 

Passive funds tracking the index have no choice but to buy these bonds as they are added, regardless of whether they offer attractive yields or valuations. They also inherit the longer interest-rate sensitivity created by the deal, whether they intended to or not.

 

This matters in today’s market because credit spreads are already close to historic lows, meaning that investors are receiving relatively little compensation for taking on additional credit and duration risk. As hyperscalers increasingly tap the bond market for finance, their index weights will rise automatically. Yet these companies typically borrow at low yields given their strong credit ratings. Passive investors may therefore find themselves with greater allocations to very large, long-dated technology bonds that offer limited income.

 

Unintended consequences

 

The current market environment highlights a key limitation of passive income strategies. As hyperscalers borrow more, their index weights rise automatically, reshaping corporate bond indices without any active decision-making. This dynamic can matter for performance. As the charts show, in 2025, sectors with the largest increases in bond issuance tended to underperform the broader market, illustrating how heavy supply can weigh on returns.

 

Supply was indicative of performance in 2025

 

Source: Barclays. Data as at 31 December 2025.

 

Tech underperformed despite higher quality

Source: Bloomberg: Bloomberg US Technology Index vs Bloomberg US Aggregate Corporate Index as at 15 April 2026.  

 

The effect on equities

 

Looking through an equity lens offers a different picture but a similar conclusion –passive income strategies have their limitations.

 

While the mega-cap tech companies are investing heavily and financing part of this through the debt markets, they remain highly profitable and cash-generative businesses. For example, last year Microsoft paid out $24bn in dividends, making it one of the world’s largest dividend payers (in absolute terms). Similarly, Alphabet and Meta, both of which only started paying dividends in the last few years, paid out $10bn and $5bn, respectively. While these are significant amounts in dollar terms, the profitability of these businesses means they are well covered by earnings and free cash flow and should, therefore, be sustainable.

 

The AI capex cycle has driven share prices higher across the sector and beyond, as the sheer scale of investment provides a multi-year tailwind to companies involved in the AI build-out, arguably, one of the most extensive in history. Yet because of their low dividend yields, these stocks do not feature in most passive dividend indices, which instead focus on higher-yielding stocks. These tend to be mature, slower-growing sectors like utilities, staples, telecoms and real estate, where payout ratios are usually higher. In many cases, these companies may offer income today but could lag the broader market in terms of total return over time.

 

So, current equity market dynamics differ slightly from bonds. While tech companies are becoming a larger component of passive bond indices, potentially dragging down yields, they are not a material part of passive equity income strategies. One asset class is being forced to accept lower yields and greater concentration risk, while the other may be missing a key driver of returns. The upshot is that an active approach can help navigate these unintended consequences.

 

The active advantage

 

Across both equities and bonds, passive income strategies can expose investors to structural index biases. As AI-driven investment reshapes markets, these biases may intensify, leading to allocations favouring the largest bond issuers and the highest-yielding but slower-growing companies in equities, rather than those offering the best balance of income, resilience and long-term growth.

 

These trends emphasise that income investing increasingly demands judgement and selectivity. As active managers, we have the freedom and flexibility to:

 

  • assess the quality and sustainability of income
  • avoid overconcentration in the largest borrowers or highest-yielding stocks
  • capture opportunities offering both long-term growth and income potential
  • choose when to enter the market, in which names, in what currency and, for fixed income, at which point on the yield curve.

 

By selecting opportunities across the capital structure, in both bonds and equities, we can avoid crowded issuance and diversify the sources of income in portfolios. An active approach allows us to focus on companies and issuers with the strongest investment fundamentals, supporting more sustainable long-term returns and better outcomes for our clients.

 

 

1. Bloomberg US Aggregate Corporate Index as at 31 March 2026.

2. Source: Bloomberg Sterling Corporate Index as at 31 March 2026

 

 

Important information

Author

Rory Sandilands
Portfolio Manager
Rory Sandilands, portfolio manager, is a member of the investment grade and multi-sector portfolio management teams. He specializes in global credit and absolute return portfolios.  
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