There’s an old saying on Wall Street: To achieve success as a stock fund manager, you should keep watch over rates of interest and the bond markets.
We decided to place this theory to the test:
So how can we tell whether lively equity fund managers are following bond markets? There is not any perfect answer, however the measure we’ll use here is the performance of family bond funds. Our theory is that the expertise required to provide above-average bond funds would spill over and help produce above-average returns for family lively equity funds. For example, if an asset management firm’s lively bond managers have performed poorly over the past five years, we expect their lively equity counterparts to also underperform.
With this premise in mind, we took the performance of all U.S. dollar-denominated funds over the past five years after which assigned each actively managed equity fund to its fund family and compared its performance to that of the common mutual family bond fund.
Our “Bottom Bond Fund Performers” category refers back to the bottom quartile of performance over the five reporting years and the “Top Bond Fund Performers” category refers to those funds in the highest 25%.
We tested our theory on actively managed emerging market, value, growth, small-cap, large-cap and international equity funds. In general, our results were inconclusive.
For example, the common five-year return of emerging market equity funds in families with top-quartile bond managers was -1.22% per 12 months, while the common return of families with bottom-quartile bond managers was -1.12%. The difference of -0.10 percentage points is barely significant and shows that the performance of bond funds doesn’t predict the performance of equity funds on this category.
| Top bond funds actor (Same fund family) |
Lower binding Fund performer (Same fund family) |
Difference | |
| Emerging market stocks | –1.22% | –1.12% | –0.10% |
| Value justice | 8.44% | 8.56% | –0.12% |
| Growth capital | 9.28% | 9.25% | 0.03% |
| Small cap stocks | 6.38% | 6.89% | –0.51% |
| Large-cap stocks | 7.33% | 7.19% | 0.14% |
| International Equity | 1.02% | 0.87% | 0.15% |
The only two sub-asset classes with results that might support our theory are large-cap and international stocks. In the previous case, strong performance of intrafamily bond funds is related to an outperformance of 0.14 percentage points per 12 months for equity funds relative to those in the underside quartile.
Overall, our results don’t suggest that the success of a set income fund family impacts the equity side of the ledger. Of course, our intrafamily proxy is probably not one of the best indicator of which equity fund managers pay probably the most attention to rates of interest and bond markets. Of course, only a really novel dataset could accurately discover this cohort.
If you enjoyed this post, do not forget to subscribe.
Photo credit: ©Getty Images / dszc
