Passive Management Beats Active Management for Bond Funds

Posted on July 30th, 2009 by admin in How to Invest

While we have been posting evidence that “buy and hold” is dead for equity investment management, and that some forms of active management are superior to buy and hold, the reverse seems true for bond funds. The data in this table shows that for the 1, 3 and 5 year periods ending in 2008, huge fractions of actively managed bond funds performed worse than their index benchmark.

Fraction of Actively Managed Fixed Income Funds Beaten by the Benchmark

Fraction of Actively Managed Fixed Income Funds Beaten by the Benchmark

According to this result, you should buy only passively managed bond funds if you like their underlying index benchmark. The only exception to this interpretation is for the high yield, or junk, bond funds (Barclay’s High Yield Index in the Table). These funds seem to require deep knowledge of the issuers, since they are all by definition high risk, and so active management works better than benchmark to extract risk. (Note: the original research from IndexUniverse won’t be available directly online until early August 09. We got this table from the “webinar” by Index Universe called “Advanced Fixed Income: Not Your Grandfather’s Bonds” today, 30 JUL 09.)

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