2025 Year End Funds Review was originally posted by SanJac Alpha
The Case for Active Defense
As we close out 2025, we find it essential to review how markets moved and our framework in navigating them. This year’s volatility acted as a stress test for fixed income. Bond investors often ask the question: Can you generate solid overall returns without stretching to unacceptable levels of risk?
At SanJac Alpha, our objective was to answer that question affirmatively. By decoupling our performance from the volatility of the broader passive indices, we sought to actively position portfolios to be robust in a high-volatility market. Active management is not only aiming to outperform benchmarks with higher returns but also trying to suppress volatility and reduce the chance of drawdowns.
We share our review of what went well in 2025, and where we are refining our approach for the year ahead.
The Macro Context: When Passive Bond Strategies Can Struggle
To understand our performance, we first have to look at the environment within the context of history. The Merrill Lynch Option Volatility Estimate (MOVE) Index measures overall bond uncertainty by measuring implied volatility across options in the 2-year, 5-year, 10-year and 30-year bonds. Generally, in low MOVE environments (<75) carry trades work as well as long duration and other passive strategies.
The 15-year MOVE chart shows how during the decade from 2011 through 2021, the average MOVE reading was 67.8 and passive strategies often performed as well as active strategies. When the market changed in late 2021 and volatility rose, the subsequent 5 years averaged 104.8. The peak to trough measurements were stark as well, wreaking havoc on income portfolios that were not actively managed to risk and uncertainty.
The “quiet” years of bond investing appear to be behind us, and passive funds are forced to absorb this volatility. SanJac Alpha’s active management mandate places us in a position to emphasize risk management as a core feature of a fixed income portfolio. This was the cornerstone of our success this year.
What Went Well: Defense Against Drawdowns (SJCP)
For the SanJac Alpha Core Plus Bond ETF (SJCP), our primary victory for 2025 was controlling the duration of our portfolio and featuring investment grade credit and government agency mortgage exposure.
Early in 2025, the broader bond market experienced a significant drawdown. The passive benchmark (the iShares Core U.S. Aggregate Bond ETF, or “AGG”) suffered a drawdown nearing -10%. In a passive fund, investors have no choice but to ride through the declines.
As illustrated above, SJCP maintained a controlled drawdown profile throughout the period shown. Despite heightened volatility around April, the fund’s maximum drawdown for the year remained below 2%.
From SJCP’s launch we made the case that “Core Plus” should not be limited to chasing higher returns, it should also mean avoiding the long duration traps that hurt benchmarks. The chart below shows the total return profile for SJCP vs the AGG since our September 2024 inception:
What Went Well: Alpha Generation (SJLD)
While SJCP aimed to defend against expected duration volatility, the SanJac Alpha Low Duration ETF (SJLD) was more a story of alpha generation.
In the low-duration space, many investors settle for money-market-style returns. With volatility already low without longer duration to hedge, we aimed to find alpha in the short end of the rate curve. By utilizing our heavily researched bottom-up credit selection, we were able to identify pockets of what we believed were high-quality, short-term bonds with potential to offer yield premiums without excessive credit risk. The use of floating rate instruments also paid off in a market that was overestimating Fed rate cuts for the year.
SJLD consistently pulled away from the Vanguard Short-Term Bond ETF (BSV), ending the period with a total return near 6% compared to the benchmark’s ~4.5%. Looking for extra spread in a short-duration environment is one of the primary research goals of our trading team.
Areas for Refinement: The Path Forward
Transparency is a core value at SanJac Alpha. While we are proud of our 2025 performance, we are constantly analyzing where we can do better.
- Optimizing Upside Capture – For SJCP, our defensive posture worked effectively in limiting drawdowns during periods of market stress this year. At the same time, we continuously evaluate ways to improve participation during market rallies. In July, we added Treasury Inflation-Protected Securities (TIPS), which differ from traditional Treasuries in that their principal value adjusts with changes in inflation, while continuing to pay a real yield. As a result, TIPS can contribute to downside resilience during inflationary or growth-uncertain environments while also supporting improved return participation when rates stabilize or decline. As shown in the monthly total return chart below, SJCP made some progress in outperformance during duration rallies by achieving better total returns than the AGG in August and October, both months in which bond markets were generally up.
- Managing Volatility in Short Duration While SJLD outperformed solidly on returns, that performance came with a higher variance. Our data shows that SJLD at times operated with a higher relative standard deviation than the passive Vanguard Short-Term Bond Index Fund ETF (BSV) even as absolute volatility remained low overall.
The chart below shows the rolling standard deviation in SJLD vs BSV. Often there is a fine risk-reward tradeoff to a more active reactivity, but we would strive to dampen volatility spikes as much as possible. Ideally, low duration should be a smooth path to attractive income.
The Outlook for 2026
We expect to release an outlook in early 2026 to share our macro views in greater detail, along with our plans to continue performing for investors.
In short, we see volatility continuing and possibly increasing into 2026 as investors in many large cap equities may seek greater diversification in areas like active fixed income. Tax selling in Q1 of 2026 could be a theme as investors seek to postpone taxes on the capital gains of previous years into 2027.
Our management team is anticipating this rotation while remaining mindful of many challenges in the rate markets, including a slowdown in Fed cuts, persistent inflation, and large fiscal government deficits which could place pressure on bond prices by increased supply in treasury issuance.
As we navigate the complexities of duration and risk in fast changing markets, our objective remains the
same: maximizing current income and total return while guarding against excess volatility and occasional
drawdowns, which are primary characteristics of the current bond market.
Visit SanJac Alpha to learn more: SanJac Alpha
IMPORTANT INFORMATION
The Funds’ investment objectives, risks, charges, and expenses must be considered carefully
before investing. The prospectus contains this and other important information about the
investment company. Please read it carefully before investing. A hard copy of the prospectus
can be requested by calling 1-800-617-0004.
These market observations are the views of SanJac Alpha as of December 18, 2025, and we undertake no obligation to update these observations. Our views are shared for information purposes only, and should not be considered, or relied upon as, financial advice. SanJac Alpha accepts no responsibility for any loss arising from the use of any information contained herein, and investors should consider their own personal circumstances and, as appropriate, seek professional advice for any investment decisions.
All investing involves risk, including loss of principal.
SJLD is subject to additional risks related to its shorter maturity profile, including duration and interest rate risk, call risk, extension and prepayment risk, and government obligations risk. SJCP is subject to additional risks associated with its broader investment mandate, including structured products risk, mortgage servicing rights risk, mREIT risk, preferred securities risk, and municipal securities risk.
Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns.
Please refer to the prospectus for a complete discussion of these and other risks. Drawdown – the investment loss experienced from a high point to a low point. MOVE Index -the Merrill Lynch Option Volatility Estimate (MOVE) Index reflects the level of volatility in U.S. Treasury futures. The index is considered a proxy for term premiums of U.S. Treasury bonds. Carry Trade – any strategy where an investor borrows capital at a lower interest rate to invest in assets with potentially higher returns. Duration – measures how long it takes, in years, for an investor to be repaid a bond’s price through its total cash flows. It is also used as a tool to determine the change in a bond’s value in relation to interest rate movements. iShares Core U.S. Aggregate Bond ETF (AGG) – seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. Alpha – a measure of an investment’s performance that indicates its ability to generate returns in excess of its benchmark. Yield Premium – the incremental yield associated with an investment relative to lower-risk alternatives, which may reflect compensation for factors such as credit risk, liquidity, or structural characteristics rather than a defined benchmark spread. Treasury Inflation-Protected Securities (TIPS) – a form of compensation that a mortgage broker, acting as the intermediary, receives from the originating lender for selling an interest rate to a borrower that is above the lender’s par rate for which the borrower qualifies. Variance – a statistical measurement of how large of a spread there is within a data set. Vanguard Short-Term Bond Index Fund ETF (BSV) – Vanguard Short-Term Bond Index Fund ETF (BSV).
ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact an ETF’s ability to sell its shares.
Diversification does not eliminate the risk of experiencing investment loss.
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