Martin Rohleder

Duration-Adjusted Bond Fund Performance

We uncover a previously neglected mechanical bias in bond fund performance due to the use of benchmarks with non-matching durations. We show that the duration bias is caused by the non-linear reaction of bonds with different durations to interest rate changes. We find empirically that the usual use of a broad bond index in previous research leads to a significant overestimation of average bond fund performance and to spurious findings of performance persistence. The key takeaway of our research is thus, that bond fund performance should be duration-adjusted by choosing for each fund the benchmark index which best matches its duration.We uncover a previously neglected mechanical bias in bond fund performance due to the use of benchmarks with non-matching durations. We show that the duration bias is caused by the non-linear reaction of bonds with different durations to interest rate changes. We find empirically that the usual use of a broad bond index in previous research leads to a significant overestimation of average bond fund performance and to spurious findings of performance persistence. The key takeaway of our research is thus, that bond fund performance should be duration-adjusted by choosing for each fund the benchmark index which best matches its duration.

Does Style-Shifting Activity Predict Performance? Evidence from Equity Mutual Funds

This study introduces an innovative approach to measuring the “style-shifting activity” (SSA) of mutual funds using daily returns. Applying our new measure to a comprehensive sample of 2631 active US equity mutual funds, we show (i) that SSA predicts future performance, especially for current outperformers, and (ii) that SSA adds new information previously not captured by alternative return-based activity measures such as tracking error or R-squared. Comparing the three measures, we show that SSA captures activity very selectively, which makes it a stable and reliable predictor of future performance. Tracking error and R-squared, however, seem to additionally capture some unobserved fund characteristics, as the direction and power of their predictions depend heavily on the consideration of time- and fund-fixed effects. Moreover, investment strategies based on past SSA and past performance earn up to 2.4% (3.6%) p.a. risk-adjusted net (gross) returns which is economically and statistically significant.

The Relation between Past Flows and Future Performance: Simple Investment Strategies in the Mutual Fund Sector

In the mutual fund literature, it is an established fact that investors “chase past performance”. However, the opposite impact of flows on performance is widely discussed. Mainly, liquidity costs are held responsible for short-term erosion of performance, while high inflows enhance performance over longer horizons. I investigate this relation for various groups of equity, bond, and money market funds and find significant outperformance in high inflow funds over several months, especially for specific bond fund groups. In addition, I test whether this information can be exploited using simple investment strategies but find that the abnormal returns are too low to offset associated costs.

Success and Failure on the Corporate Bond Fund Market

We present the first broad overview of the factors determining corporate bond fund success and failure in terms of performance and survival. We show that the main determinant of survival is size. Performance matters only for small funds while large funds survive unconditionally, consistent with maintaining fee revenues. We neither find persistence in performance nor diseconomies of scale. This is due to advantages of larger funds in corporate bond trading. Other fund and family characteristics are unrelated to performance and survival, contrasting previous finings in equity funds. Thus, there are similarities but also important differences between the factors determining success and failure on the corporate bond and equity fund markets.

Systemic interest rate and market risk at US banks

This paper is the first to quantify and analyze the dynamics of market risk (MR) and interest rate risk (IRR) of the system of US bank holding companies (BHCs) based on time-varying risk exposures estimated using the Kalman filter. These dynamics can be ex-plained to a considerable degree by the development of the macro economy as well as by the state and structure of the banking system itself. We further determine each single bank’s contribution to the banking system’s MR and IRR and show that single banks have non-trivial leverage over the banking system’s systematic risk exposure at specific times. Such risk contributions can be explained by banks’ financing or deposit base, maturity transformation intensity and interest income, earnings diversification and the liquidity of banks’ holdings. Our findings thus facilitate better oversight and management of the systematic risks inherent in the banking system.

Bond Fund Disappearance: What’s Return Got to Do with it?

In their seminal paper on bond fund performance, Blake, Elton and Gruber (1993) state that survivorship bias is unimportant for this market segment. Many bond fund studies have since been published without treating survivorship bias despite the dramatic changes in the market over the last 20 years. We fill this gap by analyzing survivorship bias and disappearance of bond funds comprehensively. As key determinants we identify fund size and flows. Compared to equity funds, returns have minor influence on disappearance. However, we find statistically significant and economically relevant survivorship bias, in particular for certain asset classes like corporate bond funds.