Behind the Benchmark: Dissecting Active Bond Fund Performance

Abstract

This article analyzes the performance of US active fixed-income mutual funds and exchange-traded funds across four major categories: aggregate, government, corporate, and high yield. Using more than two decades of return data, we assess whether managers consistently outperform their stated benchmarks and identify the drivers of excess returns. Whereas aggregate and corporate funds show modest outperformance, further analysis reveals that these gains are largely explained by systematic exposures, particularly to credit spreads, rather than persistent alpha. Government and high-yield managers, by contrast, often underperform their benchmarks, especially over longer horizons. We introduce technical benchmarks that more accurately reflect each fund’s risk profile using credit and curve factor exposures. When evaluated against these, success rates and median active returns drop significantly, suggesting that much of the perceived alpha is replicable through exposure to credit risk. These findings challenge the notion that fixed income is fertile ground for active management and reinforce the benefit for cost-efficient, transparent, and passive funds.