US Bond Mutual Funds Skill, Scale and Value Added

Abstract

This research thesis aims at applying the performance measures of Barras et al. (2021) on US bond mutual funds from July 2004 to December 2020 unlike most studies which concern equity mutual funds. Performance can be assessed in several ways but the most common measure of performance stays the abnormal return (alpha). However, this thesis supports that assessing the managers’ skill the same way as assessing the fund’s performance might not deliver the right conclusions especially regarding the managerial skills. Thereby, the gross alpha has been broken down into a skill and a scale coefficient. Mutual funds suffering from diseconomies of scale, the managers might be skilled but their performance could be undermined by the size of the fund. The results show that most US bond mutual funds are actually skilled, confirming the previous statement. Then, the performance of the fund is assessed based on the value added it brings to the market which is calculated by multiplying the gross alpha by the average fund’s size. The densities of the skill, scale and value added measures could be deduced thanks to a non-parametric approach. As a result, it has been possible to obtain some reliable bias-adjusted densities from which some conclusions can be drawn, i.e. 87% of the bond funds create value in the market between 2004 and 2020.