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For some, the teams and justifications change year by year. For others, especially die-hard fans, it almost doesn’t matter how good or bad their team did LAST season, THIS season their team will be champions.
The same is true with investing. Some people become enamored with a manager or style (active vs. passive) and choose to keep their money invested in that style/manager year after year regardless of comparable results. Others choose to revisit their decisions on a regular basis.
This is where the debate usually starts about how best to invest. I’ve read plenty of articles about which is a better way to invest in the stock market, passive vs. active, but I haven’t come across analysis about the bond market so I ran the reports myself.
Here are five findings of after comparing bond fund returns across the Morningstar Intermediate-Term Bond category. Data as of April 30, 2013[1]:
- 22.3% or 413 of the 1,153 intermediate term bond funds Morningstar tracked for the one year April 2012 – April 2013 outperformed their index.
- 24.7% or 426 of the 994 intermediate term bond funds Morningstar tracked for the 3 years April 2010 – April 2013 outperformed their index.
- 34.7% or 391 of the 868 intermediate term bond funds Morningstar tracked for the 5 years April 2008 – April 2013 outperformed their index.
- 14.9% or 130 intermediate term bond funds outperformed their index over two different time frames (example 1 Year and 3 Year, or 1 Year and 5 Year, or 3 Year and 5 Year)
- 25.5% or 221 intermediate term bond funds outperformed their index over all three (1, 3 and 5 Year) time frames.
- This last point surprised me the most. I actually expected more funds would outperform over two time frames rather than all three time frames.
Before the Index crowd runs out and declares their team the victor, be aware of the wide mix of bond investing styles Morningstar places in the Intermediate Term Bond category. Here are just a few:
- Funds that invest primarily in mortgage bonds such as DoubleLine Total Return
- Funds that invest in corporate and government bonds such as PIMCO Total Return or Vanguard Total Bond Index
- Funds that invest primarily in corporate bonds
- Funds that invest primarily in preferred stocks
- Funds that invest using leverage or derivatives and as well as funds that have no leverage or derivatives
- Funds that invest only in investment grade bonds and as well as funds that have exposure to both investment grade and high yield bonds
- Funds that have exposure to international bonds and as well as funds that have no exposure to international bonds
[1] Source: Morningstar
