Passive bond fund management is an oxymoron (or the case for the active management of bond funds)

96 Pages Posted: 1 Apr 2020 Last revised: 9 Jan 2024

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Martijn Cremers

University of Notre Dame; ECGI

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: October 11, 2021

Abstract

In sharp contrast to equity funds, the active management of bond funds has remained popular. The percentage of assets passively managed among equity mutual funds are more than double that among bond mutual funds. That difference can be explained by the exceptional difficulties of passive bond fund management and the strong relative performance of active bond funds. We find no evidence that the average active bond fund underperforms the average passive bond fund. We attribute that result, in part, to passive bond funds facing a difficult trade-off between tracking their benchmark and maintaining liquidity, which results in high levels of activeness and trading relative to passive equity funds. That result is also attributable, in part, to highly active bond funds—those with high active share in particular—substantially outperforming passive funds (0.74% per year, t-stat = 2.40). Highly active bond funds also exhibit a more convex flow-performance relation, consistent with the alleviation of investor run risk. Summarizing, actively managed bond funds have remained relatively popular because they tend to benefit investors.

Keywords: Bond, Mutual Funds, Active Management, Active Share, Alpha

JEL Classification: G10, G11, G14, G20, G23

Suggested Citation

Choi, Jaewon and Cremers, K. J. Martijn and Riley, Timothy Brandon, Passive bond fund management is an oxymoron (or the case for the active management of bond funds) (October 11, 2021). Available at SSRN: https://ssrn.com/abstract=3557235 or http://dx.doi.org/10.2139/ssrn.3557235

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Timothy Brandon Riley

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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