Predicting Bond Fund Returns

Abstract

Previous studies disagree as to whether bond fund returns can be predicted. These differences in conclusions are likely due to differences in the samples. This study examines the ability of expense ratios and prior five-year returns to predict 1995–1999, 2000–2004, and 2005–2009 net returns on domestic taxable bond funds within the same Morningstar 3-by-3 fixed-income style box. The conclusions include that expense ratios predicted a smaller portion of returns for 2005–2009 than in prior five-year periods.

TOPICS: Mutual funds/passive investing/indexing, fixed-income portfolio management, analysis of individual factors/risk premia