Measuring bond mutual fund performance with portfolio characteristics |
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Institution: | 1. VU University Amsterdam, Amsterdam, The Netherlands;2. Erasmus School of Economics, Rotterdam, The Netherlands;3. VU University Amsterdam and Tinbergen Institute, Amsterdam, The Netherlands;4. Loyens & Loeff, Paris, France;1. Marshall School of Business, University of Southern California, 3670 Trousdale Parkway, Suite 308, Los Angeles, CA 90089, United States;2. National Bureau of Economic Research, United States;3. E. J. Ourso College of Business, Louisiana State University, Room 2900 Business Education Complex, Baton Rouge, LA 70803, United States |
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Abstract: | This paper studies the performance of U.S. bond mutual funds using measures constructed from a novel data set of portfolio weights. Active fund managers exhibit outperformance before costs and fees generating, on average, gross returns of 1% per annum over the benchmark portfolio constructed using past holdings (approximately the same magnitude as expenses and transaction costs combined). This suggests that fund managers are able to earn back their fees and costs. There is evidence of neutral ability to time different portfolio allocations (sector, credit quality, and portfolio maturity allocations) and only a subgroup of bond funds exhibit successful timing ability. One performance measure based on portfolio holdings predicts future fund performance and provides information not contained in the standard measures. These results provide the first evidence of the value of active management in bond mutual funds. |
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