How Do Corporate Bond Investors Measure Performance? Evidence from Mutual Fund Flows
84 Pages Posted: 12 Dec 2019 Last revised: 18 Jul 2022
Date Written: October 25, 2019
Abstract
Which factor model do investors in corporate bonds use? We examine this question by tracking investors' decisions to invest in actively managed corporate bond mutual funds with a revealed preference approach. Our main result is that \textit{all} bond factor models are dominated by the simple Sharpe ratio and Morningstar ratings. For all major corporate bond mutual fund styles, the Sharpe ratio explains fund flows better than alphas from bond factor models. Since the Sharpe ratio (and to some extent also Morningstar ratings) can be easily manipulated in bond markets, our findings have potentially severe implications for all market participants.
Keywords: Bond factor models, Sharpe ratio, bond mutual funds, investor flows, performance evaluation, flow--performance sensitivity
JEL Classification: G12, G11
Suggested Citation: Suggested Citation