Return Chasing in Bond Funds

Posted: 28 Sep 2012 Last revised: 7 Apr 2013

See all articles by Jon A. Fulkerson

Jon A. Fulkerson

University of Dayton

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: October 23, 2012

Abstract

We make use of a unique dataset of SEC Form N-SAR filings to examine the gross flows of U.S. bond funds. We find that gross inflows and outflows average around 4% of TNA per month, but net flows average only 0.26%. When modeling these flows, we see that, like equity funds, bond fund investors chase returns. Most of the return chasing is done by inflows. Funds with the highest decile of returns average 1% higher net flow and inflow per month, while the lowest decile funds lose nearly 0.6% in assets per month. Next, we find that positive net flows cause bond funds to diversify their holdings regardless of fund size. Finally, we test whether flows predict returns and find that an inflow weighted portfolio generates alphas of 0.8% per year. Bond inflows appear to be “smart money.”

Keywords: Mutual Funds, Bond, Alpha, Flows, Return Chasing, Smart Money

Suggested Citation

Fulkerson, Jon A. and Jordan, Bradford D. and Riley, Timothy Brandon, Return Chasing in Bond Funds (October 23, 2012). Journal of Fixed Income, Spring 2013, Vol. 22, No. 4: pp. 90-103, Available at SSRN: https://ssrn.com/abstract=2153832 or http://dx.doi.org/10.2139/ssrn.2153832

Jon A. Fulkerson (Contact Author)

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Bradford D. Jordan

University of Florida ( email )

Gainesville, FL 32611
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Timothy Brandon Riley

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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