Which Bond Funds Manage to Outperform After Fees?

The typical active fixed-income fund manager struggles to beat the benchmark after fees. Are investors better off buying an ETF?

Mara Dobrescu 7 August, 2018 | 12:18AM
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The typical active fixed-income fund manager struggles to beat the fund’s benchmark after fees. As low-cost passive options become more available in the fixed-income space, investors need to be able to assess the relative merits of active and passive bond funds to make informed investment decisions. What are an investor’s odds of selecting an active fund that is likely to outperform its benchmark after fees?

In which categories is it preferable to choose a low-cost passive option instead? Results show that, although the median active manager can beat the benchmark in several categories before fees, after fees average returns were negative in all 25 Morningstar bond fund categories.

Unfortunately, most bond funds are priced to fail. Many fixed fees are in line with, or sometimes even above, funds’ historical outperformance, thereby destroying the value added by managers. The percentage of funds that managed to perform at least as well as the index ranged from a meagre 10.5% to 49% depending on the category.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Mara Dobrescu

Mara Dobrescu  is a fund analyst at Morningstar France.