The Performance of Corporate Bond Mutual Funds and the Allocation of Underpriced New Issues

41 Pages Posted: 29 Oct 2022 Last revised: 25 Sep 2023

See all articles by Gjergji Cici

Gjergji Cici

University of Kansas - School of Business

Scott Gibson

College of William and Mary - Mason School of Business

Nan Qin

College of Business, Northern Illinois University

Pei (Alex) Zhang

University of Kansas - School of Business

Date Written: September 24, 2023

Abstract

Unlike active equity mutual funds, active investment-grade corporate bond mutual funds generated significant positive risk-adjusted returns before fees from 2002–19. We examine a potential source of this pre-fee alpha—underpriced new corporate bond offerings, which are far more frequent and much larger in total dollar terms than equity offerings. Using a novel return-based method to detect allocations of corporate bond offerings, we find that underwriters directed underpriced allocations repeatedly to funds with which they had stronger underwriting relationships. Consistent with the concave performance-flow relationship that describes bond fund investors’ behavior, families maximized profitability by strategically distributing allocations to member funds that underperformed their style benchmark over the last year at the expense of those that outperformed. Funds most active in the primary market generated significant pre-fee alpha and outperformed those that were less active, both before and after fees.

Keywords: Corporate bonds, corporate bond fund performance, primary market allocations, underpricing, underwriting relationship

JEL Classification: G14, G20, G23, G24

Suggested Citation

Cici, Gjergji and Gibson, George Scott and Qin, Nan and Zhang, Pei, The Performance of Corporate Bond Mutual Funds and the Allocation of Underpriced New Issues (September 24, 2023). Available at SSRN: https://ssrn.com/abstract=4259433 or http://dx.doi.org/10.2139/ssrn.4259433

Gjergji Cici (Contact Author)

University of Kansas - School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-3873 (Phone)

HOME PAGE: http://business.ku.edu/gjergji-cici

George Scott Gibson

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757/221-1673 (Phone)

Nan Qin

College of Business, Northern Illinois University ( email )

740 Garden Road
236G
DEKALB, IL 60115
United States

Pei Zhang

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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