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

We decided to put this theory to the test:

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

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

Our Bottom Bond Fund Performers category designates the lowest performance quartile over the five years under review, and Top Bond Fund Performers the funds that are in the top 25%.

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

Chart for Handbook of AI and Big Data Applications in Investments

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

Best bond fund
(Same family of funds)
Bottom link
Fund interpreters
(Same family of funds)
Emerging Markets Equities –1.22% –1.12% –0.10%
Value Equity 8.44% 8.56% –0.12%
Growth equity 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 Equities 1.02% 0.87% 0.15%

The only two asset subclasses whose results could support our theory are large-cap and international equities. In the first case, the strong performance of family bond funds is associated with an annual outperformance of 0.14 percentage points of equity funds relative to those in the bottom quartile.

Overall, our results do not indicate that the success of a fund family with bond funds trickles down to the equity side of the ledger. Of course, our family proxy may not be the best indicator of which equity fund managers are paying the most attention to interest rates and bond markets. Certainly, only a truly new dataset could accurately identify this cohort.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images / dszc

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Derek Horstmeyer

Derek Horstmeyer is a professor at the George Mason University School of Business, specializing in the performance of exchange-traded funds (ETFs) and mutual funds. He is currently Director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-run investment fund at GMU.

Ruben Devia, CFP

Ruben Devia, CFP, graduated from George Mason University in 2014. He earned a bachelor’s degree in finance with a minor in mathematics. He is currently a CFP®️ professional working in the financial services industry. His job is to help people achieve their financial goals at all stages of life.

Xiaozhu Zhang

Xiaozhu Zhang is currently a senior at George Mason University pursuing a bachelor’s degree in finance. She plans to study for a Masters in Finance in Risk Management after graduation. She’s a student on the dean’s list. She is preparing for the CFA level I exam and an internship in an accounting firm. She has skills in financial analysis, risk management, Python and R. She wants to pursue a career as a financial analyst or risk manager.

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