Active Share and Bond Mutual Funds

56 Pages Posted: 1 Apr 2020 Last revised: 8 Jan 2021

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Martijn Cremers

University of Notre Dame; ECGI

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: January 8, 2021

Abstract

We examine how active share—the extent to which a portfolio’s holdings differ from its benchmark’s holdings—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-level (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

Choi, Jaewon and Cremers, K. J. Martijn and Riley, Timothy Brandon, Active Share and Bond Mutual Funds (January 8, 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

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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