Persistence in the Performance of Corporate-Bond Mutual Funds
We evaluate the performances of corporate-bond mutual funds from 1990 to 2004. On average, funds
generate slightly positive abnormal returns before fees and slightly negative abnormal returns after fees.
Moreover, the top decile of funds over the past year outperforms the bottom decile, net of expenses and
trading costs, by ten basis points per month over the next four years for high-quality funds and twenty
basis points per month for high-yield funds. This persistent performance seems due to the bond-selection
skill of the winning managers. Remarkably, the winners are able to generate positive alpha gross of
expenses over the next four years. Investors exploit this persistence in performance for high-yield funds,
as funds with inflows outperform funds with outflows over the next year. Finally, since the returns of the
underlying corporate bonds do not display momentum, it is noteworthy to find evidence of persistence and
rewards to chasing past performance since these two findings for equity funds depend heavily on the
confounding influence of momentum in the underlying stock returns.
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generate slightly positive abnormal returns before fees and slightly negative abnormal returns after fees.
Moreover, the top decile of funds over the past year outperforms the bottom decile, net of expenses and
trading costs, by ten basis points per month over the next four years for high-quality funds and twenty
basis points per month for high-yield funds. This persistent performance seems due to the bond-selection
skill of the winning managers. Remarkably, the winners are able to generate positive alpha gross of
expenses over the next four years. Investors exploit this persistence in performance for high-yield funds,
as funds with inflows outperform funds with outflows over the next year. Finally, since the returns of the
underlying corporate bonds do not display momentum, it is noteworthy to find evidence of persistence and
rewards to chasing past performance since these two findings for equity funds depend heavily on the
confounding influence of momentum in the underlying stock returns.
[download pdf]