Bond mutual fund performance: Evidence from the skill ratio and false discovery rate

Abstract

This paper applies a Skill Ratio under a False Discovery Rate (FDR) framework to bond mutual funds showing many bonds mutual fund managers are skilled primarily to the benefit of fund sponsors. Our Skill Ratio is the t-statistic of realized gross value added $\left(\mathrm{RV}{A}_G\right)$ based on investible Morningstar benchmark-adjusted monthly returns times the natural logarithm of assets under management (AUM). We apply a new simulation process for FDR that mitigates small sample bias and mis-discovery on tails. For 571 actively managed domestic bond mutual fund managers between 1999 and 2016, 28.7% are skilled, including 36.3% of 226 corporate funds and 17.3% of 345 government funds.