Larry Swedroe examines a new study that highlights the negative relationship between activity and performance in bond funds.
Does it pay to be active in fixed-income markets? To help answer that question, Martin Rohleder, chair of Finance and Banking at the University of Augsburg, examined the performance of active fund managers in his December 2017 study, “Bond Fund Performance: Does Management Activity Pay?”
His data set included more than 600 corporate and government bond funds, and covered the period 1987 to 2015. The performance measurement model Rohleder used adjusted for exposure to risks that included duration, default, optionality (such as exists in mortgage-backed securities) and equity risk. Following is a summary of his findings:
Rohleder concluded there is consistent and robust empirical evidence that the relationship between activity and performance in bond funds (corporate and government) is, in fact, overall negative, and that this is especially the case for timing activity. He also found that his results were strongest in the most recent period. Hence, he writes, “management activity does not pay in this growingly important asset class.”
That the strongest negative results came in the most recent period is consistent with the findings on active equity managers. The logical explanation for this is that markets are becoming ever more efficient over time due to increasing informational efficiency and the competition’s greater level of skill. If you are interested in reading more on this subject, I’d recommend my book, “The Incredible Shrinking Alpha.”
Another interesting finding was that expensive bond funds and funds that increase their expenses have subsequently more active managers. The logical explanation is that such funds must attempt to overcome their higher expenses. Unfortunately, Rohleder found that the higher activity did not produce higher returns.
Rohleder’s findings are entirely consistent with those from the S&P Dow Jones Indices Versus Active (SPIVA) scorecards, which have compared the performance of actively managed mutual funds to their appropriate index benchmarks since 2002. The 2017 midyear scorecard, the latest available, includes 15 years of data on the performance of actively managed bond funds. Following is a summary of the report’s results:
The bottom line is that active management is just as much, if not more, of a loser’s game in fixed-income markets as it is in equity markets—with the result being that the prudent strategy (the one most likely to allow you to achieve your financial goals) is to have your bond investments in low-cost, passively managed vehicles.
This commentary originally appeared January 31 on ETF.com
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