The Impact of Market Conditions on Bond Fund Managers

Most of the academic literature investigating active management finds that active managers in aggregate underperform relative to their benchmarks. Overall and for subcategories of bond funds, Blake, Elton, and Gruber [2010] show that fund managers underperform relevant indexes after expenses are taken into consideration. Fischer and Wermers [2012, p. 287], however, note that the proponents of active management argue its benefits are most pronounced in periods of heightened volatility and economic stress.
Support for this claim is provided by Kacperczyk, Nieuwerburgh, and Veldkamp [2013] who show that the effectiveness of manager skills is not only time-varying but also market-environment-dependent. Reibnitz [2015] shows active equity strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The active management literature cited above focused principally on equity markets. In this paper, we validate whether these findings hold in the case of active fixed income management.