Wall Street has an old adage. To be a successful stock fund manager, follow the interest rate and bond markets.
I decided to test that theory.
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So how do you know if an active equity fund manager is following the bond market? There is no perfect answer, but the proxy we apply here is the performance of intrafamily bond funds. Our theory is that the expertise needed to create superior performing fixed income funds will ripple through to help cohort active equity funds generate above-average returns. For example, if an asset manager’s active fixed income manager has performed poorly over the past five years, we would expect its active equity counterpart to similarly underperform.
With this premise in mind, we extract the performance of all U.S. dollar-denominated funds over the past five years, match each actively managed equity fund to its respective fund family, and compare that performance to the average within the family. We compared it to the performance of fixed income mutuals. fund.
The Bottom Bond Fund Performer category designates the worst performing quartile over the five-year period studied, while the Top Bond Fund Performer designates the top 25% of funds.
We tested the theory across actively managed emerging market, value, growth, small cap, large cap, and international equity funds. In general, our results were inconclusive.
For example, families with the top quartile fixed income managers of an emerging market equity fund had an average five-year return of -1.22% annually, while families with the bottom quartile fixed income managers averaged an average return of -1.12. % was. A difference of -0.10% is hardly significant, indicating that bond fund performance does not predict the performance of equity funds in this category.
top bond fund Performer (same fund family) |
bottom bond fund performer (same fund family) |
difference | |
emerging stocks | –1.22% | –1.12% | –0.10% |
value equity | 8.44% | 8.56% | –0.12% |
growth equity | 9.28% | 9.25% | 0.03% |
small cap | 6.38% | 6.89% | –0.51% |
large cap | 7.33% | 7.19% | 0.14% |
international stocks | 1.02% | 0.87% | 0.15% |
Large caps and international equities are the only two sub-asset classes with results that support our theory. In the former, the better performing bond funds within the family lead to 0.14 percentage points higher annual outperformance for equity funds compared to funds in the lower quartile.
Overall, our results do not show that a fund family’s success with fixed income funds is reflected on the equity side of the ledger. Of course, our family proxy may not be the best measure of which equity fund managers pay the most attention to interest rates and bond markets. , just a truly new data set.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
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