Maturity-Matched Bond Fund Performance

Markus Natter, Martin Rohleder and Marco Wilkens

Financial Analysts Journal, 2021, vol. 77, issue 2, 83-96

Abstract: Performance regressions lever expected benchmark returns linearly to the risk exposures of the fund. The interest rate (IR) risk premium, however, usually follows a decreasingly upward-sloping yield curve, characterizing the nonlinearity between expected return and IR risk exposure—for example, maturity or duration. If the exposures of the fund and the benchmark differ, this discrepancy causes alpha to deviate from the active bond selection performance it is supposed to measure. Performance ratings and investor flows are affected by this alpha deviation. Our simple remedy is to individually match funds and benchmarks using their durations. Beta and R2 are candidates for alternative matchings.Disclosure: The authors report no conflicts of interest. Editor’s Note: Submitted 10 July 2020Accepted 9 December 2020 by Stephen J. BrownThis article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Quan Wen and one anonymous reviewer were the reviewers for this article.

Date: 2021
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DOI: 10.1080/0015198X.2020.1865695

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