Practical analysis for investment professionals
18 April 2023

Do the Best Equity Fund Managers Follow the Bond Market?

There is an old adage on Wall Street: To succeed as an equity fund manager, follow interest rates and the bond markets.

We decided to put that theory to the test:

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So, how do we determine whether active equity fund managers are following the bond markets? There is no perfect answer, but the proxy we apply here is the performance of in-family bond funds. Our theory is that the expertise required to produce outperforming bond funds would spill over and help generate above average returns for in-family active equity funds. For instance, if an asset management firm’s active bond managers did poorly over the past five years, we would anticipate their counterparts in active equity to underperform as well.

With this premise in mind, we pulled the performance of all US dollar-denominated funds over the past five years and then matched each actively managed equity fund to their fund family and compared its performance to that of the average in-family fixed-income mutual fund.

Our Bottom Bond Fund Performers category designates the lowest performance quartile over the five years under review, and the Top Bond Fund Performers those funds in the top 25%.

We tested our theory across actively managed emerging market, value, growth, small-cap, large-cap, and international equity funds. In general, our results were inconclusive.

Graphic for Handbook of AI and Big data Applications in Investments

For instance, the average five-year return of emerging market equity funds in families with top-quartile bond managers was –1.22% per year, while the average return of those in a family with bottom-quartile bond managers was –1.12%. The –0.10 percentage point difference is hardly significant and demonstrates that bond fund performance does not predict equity fund performance in this category.

Top Bond Fund
(Same Fund Family)
Bottom Bond
Fund Performers
(Same Fund Family)
Emerging Market Equity–1.22%–1.12%–0.10%
Value Equity8.44%8.56%–0.12%
Growth Equity9.28%9.25%0.03%
Small-Cap Equity6.38%6.89%–0.51%
Large-Cap Equity7.33%7.19%0.14%
International Equity1.02%0.87%0.15%

The only two sub-asset classes with results that might support our theory are large-cap and international equities. In the former, strong in-family bond fund performance is associated with 0.14 percentage points of equity fund outperformance per year compared to those in the bottom quartile.

All in all, our results do not indicate that a fund family’s success with bond funds translates to the equity side of the ledger. Of course, our in-family proxy may not be the best gauge of which equity fund managers pay the most attention to interest rates and the bond markets. To be sure, only a truly novel set of data could accurately identify that cohort.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / dszc

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About the Author(s)
Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, specializing in exchange-traded fund (ETF) and mutual fund performance. He currently serves as Director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-managed investment fund at GMU.

Ruben Devia, CFP

Ruben Devia, CFP, is a 2014 George Mason University graduate. He obtained a bachelor’s degree in finance with a minor in mathematics. He is currently a CFP®️ professional working in the financial services industry. His job consists of helping people achieve their financial goals through all stages of their lives.

Xiaozhu Zhang

Xiaozhu Zhang is a current senior at George Mason University pursuing a bachelor’s degree in finance. She plans to study for a master’s degree of finance in risk management after graduation. She is a dean’s list student. She is preparing for the CFA level I exam and an internship at an accounting firm. She has skills in financial analysis, risk management, Python, and R. She is interested in pursuing a career as a financial analyst or risk manager.

2 thoughts on “Do the Best Equity Fund Managers Follow the Bond Market?”

  1. Kirk Cornwell says:

    Watch (and invest in) corporations that obviously follow interest rates and are able to finance or refinance at low rates. This is a long-term edge that will keep on being so.

  2. Tony Hayes CFA says:

    You might consider dividends as well as interest rates and bonds to determine the value of equities.

    For updated charts please contact me

    Tony Hayes CFA
    [email protected]

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