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Timing Ability of Bond Mutual Fund Managers

Posted in Investing Expertise, Mutual/Hedge Funds

Do managers of bond mutual funds generate value for fund holders by successfully timing the market? In the September 2009 update of their paper entitled “Measuring the Timing Ability and Performance of Bond Mutual Funds”, Yong Chen, Wayne Ferson and Helen Peters evaluate the ability of U.S. bond fund managers to time nine common factors related to bond returns. The nine factors reflect the term structure of interest rates, credit and liquidity spreads, currency exchange rates, mortgage spread and equity market returns. The authors also define seven benchmarks matching different bond fund styles. Using monthly returns for more than 1,400 U.S. bond mutual funds and contemporaneous bond market factor and benchmark data during January 1962 through March 2007, they conclude that:

  • Across all bond mutual funds over the entire sample period, the mean monthly return is 0.62% and the standard deviation of monthly returns is 1.51%.
  • After controlling for return series non-linearities unrelated to timing, the evidence for market timing ability is on average neutral to weak.
  • With these controls, 75% of bond funds significantly outperform style-matched benchmarks before fund costs (average expense ratio of each fund plus an assumed round trip trading cost associated with the fund style), but there is no evidence of net outperformance on average after costs.

In summary, evidence provides weak support for a belief that managers of U.S. bond mutual funds can on average time the bond market, but fund costs/fees offset any associated net outperformance of reasonable benchmarks.

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