The Wall Street Journal (WJS) recently published an article highlighting the fact that many bond fund managers have been beating their respective benchmarks in recent times. In fact, Morningstar has identified at least 187 bond funds that are posting positive relative performance. Included among this list are some of the largest bond fund managers in the country.
Statistically, this seems nearly impossible for a myriad of reasons. First, everyone can’t be winning the performance game. With such a large sampling pool, I would think that there should be an equal number of managers falling short. The numbers don’t suggest this however. Second, with historic low interest rates, a flat yield curve and tight spreads, bond yields are converging towards the mean, making outperformance increasingly difficult.
Come to find out, these bond fund managers are straying from the benchmark in which they are holding themselves accountable to. For example, a bond fund manager may be buying long dated and high yielding junk bonds to reach for yield yet the fund may be comparing its return thto an index comprised of shorter duration investment grade bonds. Without full disclosure, I believe this behavior is very misleading, and possibly, unethical.
On the other side of the aisle, the WSJ recently published an article highlighting the large number of US-based mutual funds that bought Facebook when it first went public. Included in this list are mutual funds that are value-oriented or seek to own companies that pay a dividend. Clearly, Facebook did not meet either criterion. Nevertheless, it appears as if the managers were seduced by the prospects of hitting a home run when in fact, the initial public offering was a disaster for most shareholders. For shareholders who continue to hold the stock, Facebook has fallen in value by 50% from its peak valuation.
Oftentimes, these indiscretions are often “overlooked” when the investment is performing well. However, when an investment turns sour, investors tend to be far less forgiving even if they themselves failed to have performed the necessary due diligence before investing in the security in the first place.
Within Sigma, we routinely examine our list of exchange-traded funds (ETFs) and fixed mutual funds to insure that they are indeed invested according to their mandate and in concert with their stated benchmarks. On several occasions, we have shied away from a fund because we discovered that the underlying components of the fund did not give us the exposure we were looking for despite how the fund was titled and marketed.
All questions and comments are welcome.
Christopher J. Kress, CFA