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Strong-Performing Bond Managers May Have Better Odds of Future Success

This study finds evidence that bond managers' risk-adjusted gross-of-fee performance tends to persist.

How much do active bond managers' performance records say about their odds of success in the future? Fund flows suggest investors give a lot of weight to past performance, often interpreting a strong record as a sign of manager skill that should continue to benefit fund investors. However, managers often take very different levels of risk from their benchmarks and each other. That can drive differences in returns that have nothing to do with skill. Risk-taking that pays off in one period may not continue to work in the next.

To better assess performance and whether that record is predictive of future performance, it's necessary to control for differences in exposure to common sources of risk and see if there's anything left over (alpha). This study attempts to do that using gross-of-fee performance from October 1994 through September 2019 for active managers in the intermediate core bond, intermediate core-plus, and high-yield bond Morningstar Categories. The full paper is now available.

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