The Performance of Corporate Bond Funds

Abstract

This thesis investigates the performance of corporate bond funds. In the first part of this thesis, a mathematical equilibrium model is derived to estimate the return of corporate bond funds. The abnormal rate of return of a fund in excess of what would be predicted by this equilibrium model is called the alpha of a fund. This alpha is used as a performance measure for corporate bond funds. In the second part of this thesis, we use a large dataset to fit this model to the data. We show that on average, corporate bond funds manage to obtain a positive alpha. Furthermore, it is shown that funds that performed strongly (weakly) in the past continue to perform strongly (weakly) in the future. Various investment strategies are suggested that exploit this persistence in performance. It is shown a portfolio of past winners can obtain an alpha of 1.77% per year, whereas a strategy of buying past winners and selling past losers can even result in an alpha of 2.77% per year. Investing in the single fund with the highest past alpha can even lead to an alpha of 2.93% per year.