What Explains Performance Persistence of Corporate Bond Mutual Funds?

Abstract

This paper examines the performance of corporate bond mutual funds during the period from 1990 to 2003. We find strong evidence of persistence in risk-adjusted performance. The reason behind the persistent performance varies across fund types. For high-quality bond funds, the persistence is driven by time-varying factor loadings, where fund managers trade dynamically on the economic information, such as the term structure and macroeconomic factors. However, the persistence of high-yield bond funds cannot be explained by the fee structure, momentum, callability, non-synchronous trading or time-varying factor loadings. Further examination on the fund flows suggests that the existence of performance persistence is due to the fact that fund flows are not sensitive to the risk-adjusted fund performance, which is consistent with the theory suggested by Berk and Green (2004). Our results have further implications for corporate bond fund selection by investors.