Active Bond Managers Fare No Better
A few months ago, I had a post discussing how actively managed bond funds have a hard time outperforming their indexes. Now, there's additional evidence on the inability of bond fund managers to add value and increase returns.
Marlena Lee of Dimensional Fund Advisors studied the performance of 2,353 bond mutual funds covering the period 1991-2008. She found that:
- Collectively, investors in active bond funds underperform by about 90 basis points (or 0.9 percent) per year. This means bond fund investors lost about $1.4 billion in 2008 in the chase for outperformance.
- Bond fund underperformance is mostly driven by fees.
- This underperformance was true across all categories of funds (government, corporate, high-yield).
- There was no evidence of winner persistence in net returns beyond the randomly expected. We can't separate skill from luck because past performance isn't predictive of future performance, while costs are a good predictor of future performance.
We also have evidence from Standard & Poor's. Here is a breakdown of the percent of active funds that failed to outperform their benchmark for the five-year period July 2004-June 2009, as reported in the latest S&P Indices Versus Active Funds Scorecard.
- Long-term government -- 98 percent
- Intermediate government -- 78 percent
- Short-term government -- 81 percent
- Long-term investment grade -- 92 percent
- Intermediate investment grade -- 80 percent
- Short-term investment grade -- 97 percent
- National municipal -- 94 percent
- California municipal -- 100 percent