Bond Fund Performance: Does Management Activity Pay?
61 Pages Posted: 6 Dec 2017 Last revised: 21 Jul 2018
Date Written: July 10, 2018
Why are investors still pouring money into active funds despite numerous findings of underperformance and growing supply of low-cost passive alternatives? Recent equity fund studies explain this behavior with a positive activity-performance relation. This study is the first consistently analyzing the activity-performance relation in corporate and government bond funds since the 1980s. Contrasting equity funds, bond fund performance negatively relates to higher activity, especially to timing. Selection activity was positively related to performance only during the 2000s but is since then negatively related. Thus, higher activity does not pay for bond funds! Digging deeper into the sources of the relation for corporate bond funds reveals that intensive derivative use, long derivatives, larger size, higher fees, lower flow risk and a non-fundamental investment approach signal a less negative relation. For government bond funds, the results suggest that management ability is generally lower than in corporate bond funds.
Keywords: Bond funds, activity, duration-adjusted performance, complex instruments, quant vs. fundamental
JEL Classification: G20, G11, G23
Suggested Citation: Suggested Citation