How skilful are US fixed-income fund managers?

The performance of equity mutual funds has been investigated extensively over the last few decades. By contrast, few papers have focussed on the performance of fixed income (bond) mutual funds. This may be for a number of reasons. First, it's arguable that the focus on equity fund returns reflects the higher, historic equity allocations in investor portfolios, particularly during the 1980s and 1990s. In comparison, bond investment was seen to be less relevant and perhaps less interesting. Second, there has been a general lack of agreement in the academic literature about the appropriate factor model to use for fixed income funds.

In the paper, How skilful are US fixed-income fund managers? the authors provide a comprehensive assessment of the performance of over 1,000 US bond mutual funds over the period from January 1998 to May 2018. The performance analysis pays particular attention to the possible impact of the Global Financial Crisis (GFC) on bond mutual fund performance, a dimension of bond mutual fund performance that, to the authors' knowledge, has not been addressed in the literature before. The paper also investigates the performance of alternative factor models of mutual fund bond returns. The preferred model here, which combines factors initially proposed by Huij and Derwall (2008) with a fund-specific benchmark, performs particularly well, and might be considered to form the basis of future performance evaluation studies of bond mutual funds.

The results of the study may be of concern to the fund industry, to regulators, and to investors. They imply that fund management companies extract most of any abnormal performance produced by the fund. So in answer to the question – how skilful are US fixed-income fund managers? – the answer is that there is evidence of skill, but that the industry itself extracts most of the rewards of this skill.

In the examination of pre- and post-GFC periods, results were more encouraging. A sub-sample analysis indicates that after the (GFC) there was a substantial increase in the number of bond funds with both positive gross-of-fee alpha and positive net-of-fee alpha performance; and also a reduction in funds with negative-alpha performance. However, because the GFC was such a unique event, it would still be difficult to conclude that these managers offer value for money for investors compared to passive alternatives.

How skilful are US fixed-income fund managers? has been published in International Review of Financial Analysis. The accepted version of the paper is available to download at City Research Online.