Do the best stock fund managers follow the bond market?

There’s an old adage on Wall Street: To succeed as a stock fund manager, follow interest rates and the bond markets.

We decided to put this theory to the test:

So how do we determine if active equity fund managers are following the bond markets? There is no perfect answer, but the proxy we apply here is the performance of intra-family bond funds. Our theory is that the expertise required to produce outperforming bond funds will permeate and help generate above-average returns for active equity funds within the family. For example, if the active bond managers at an asset management firm have performed poorly over the past five years, we would expect their active equity counterparts to underperform as well.

With this hypothesis in mind, we pulled the performance of all US dollar-denominated funds over the past five years, then matched each actively managed equity fund to their family of funds and compared its performance to that of the average fixed-income joint within the family. finance.

The bottom bond fund performance category identifies the lowest performing quarter over the five years under review, and the best performing funds identifies those in the top 25%.

We tested our theory across actively managed emerging markets, value and growth, small and large equity funds, and international equity funds. In general, our results were inconclusive.

For example, the five-year average return for emerging market equity funds in families with bond managers from the top quartile was -1.22% per year, while the average return for a family with bond managers from the bottom quartile was -1.12%. The difference -0.10 percentage point is not significant and shows that the performance of the bond fund is not predictive of the performance of equity funds in this category.

The only two sub-asset classes with results that may support our theory are large-cap stocks and international stocks. Previously, the strong performance of an intra-family bond fund correlates with 0.14 percentage point of equity fund performance annually compared to the bottom quartile bond fund’s performance.

Overall, our results do not indicate that the success of the fund family with bond funds translates to the equity side of the ledger. Of course, our intra-family proxy may not be the best gauge of which equity fund managers pay the most attention to interest rates and bond markets. Certainly only a new set of data can accurately identify that set.

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All posts are the opinion of the author. As such, it should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Photo credit: © Getty Images / dszc

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