Maturity-Matched Bond Fund Performance
Financial Analysts Journal, 77(2): 83-96.
25 Pages Posted: 2 Dec 2016 Last revised: 1 May 2021
Date Written: April 15, 2021
Abstract
Performance regressions lever expected benchmark returns linearly to the risk exposures of the fund. The interest rate (IR) risk premium, however, usually follows a decreasingly upward-sloping yield curve, characterizing the nonlinearity between expected return and IR risk exposure, e.g. maturity or duration. If the exposures of fund and benchmark differ, this discrepancy causes alpha to deviate from the active bond selection performance it is supposed to measure. Performance ratings and investor flows are affected by this alpha deviation. Our simple remedy is to individually match funds and benchmarks using their durations. Beta and R2 are candidates for alternative matchings.
Keywords: Active fund performance, interest rate risk, expected return, duration, flows
JEL Classification: G20, G11, G23
Suggested Citation: Suggested Citation