Behind the Benchmark: Dissecting Active Bond Fund Performance

This paper examines the performance of U.S. active fixed income mutual funds and ETFs across four major categories: Aggregate, Government, Corporate, and High Yield. Drawing on a comprehensive dataset covering more than two decades, we assess whether active managers consistently outperform their benchmarks and investigate the sources of any observed excess returns.

While active funds in the Aggregate and Corporate categories show modest outperformance relative to their stated benchmarks, further analysis reveals that these returns are largely explained by systematic exposures—most notably to credit spreads. Using regression and factor attribution techniques, we find that credit and curve factors account for the majority of active fund performance, leaving little evidence of persistent alpha once these risks are controlled for.

To better align performance evaluation with actual portfolio risk, we introduce technical benchmarks—customized blends of investment-grade and high-yield indices—that more accurately reflect the effective risk profiles of individual funds. When measured against these benchmarks, success rates decline sharply and median excess returns often turn negative, highlighting the extent to which traditional benchmark comparisons may overstate manager skill. While some managers do outperform passive strategies, they are relatively few, and the scale of their outperformance is often modest—far lower than commonly perceived.