Active Share and Bond Mutual Funds
51 Pages Posted: 1 Apr 2020
Date Written: March 2020
We examine how active share — the extent to which a portfolio’s holdings differ from its benchmark’s — affects the performance, risk management, and flows of bond mutual funds. Measuring active share at both the issue- and issuer-level, the average bond fund has an issue (issuer)-level active share of over 90% (60%). Funds with higher issuer-level active share persistently earn higher alphas, which helps explain the relatively slow growth of passively managed bond funds. Furthermore, funds with higher active share exhibit both lower downside risk and lower flow sensitivity to poor performance, suggesting that highly active bond fund management alleviates run risk.
Keywords: Bond, Mutual Funds, Active Management, Active Share, Alpha
JEL Classification: G10, G11, G14, G20, G23
Suggested Citation: Suggested Citation