Maturity-Matched Bond Fund Performance

Financial Analysts Journal, 77(2): 83-96.

25 Pages Posted: 2 Dec 2016 Last revised: 1 May 2021

See all articles by Markus Natter

Markus Natter

University of Augsburg

Martin Rohleder

University of Augsburg

Marco Wilkens

University of Augsburg

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

Natter, Markus and Rohleder, Martin and Wilkens, Marco, Maturity-Matched Bond Fund Performance (April 15, 2021). Financial Analysts Journal, 77(2): 83-96., Available at SSRN: https://ssrn.com/abstract=2877630 or http://dx.doi.org/10.2139/ssrn.2877630

Markus Natter

University of Augsburg ( email )

Universitaetsstrasse 16
Augsburg, 86159
Germany
+49 821 598 4497 (Phone)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/mitarbeiter/natter_markus/

Martin Rohleder (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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