The SPIVA® U.S. Year-End 2018 Scorecard shows a reversal of the relative short-term performance of fixed income funds at the end of 2018 from six months prior. Combined with the interest rates move, this might shed some light on understanding the duration positioning of active funds.
We focus on government bond funds for our analysis, since duration positioning is the most important directional exposure for this type of strategy. Exhibits 1 and 2 show changes in interest rates alongside the relative performance of government bond funds as compared to their benchmarks, using one-year gross returns.
When the bond markets changed direction from a sell-off in the first half of 2018 to a rally in the second half, the percentage of short and intermediate bond funds underperforming their benchmarks increased significantly, from 22% and 11%, to 52% and 65%, respectively. At the same time, the reverse happened to long-end government bond funds. These quick inversions of performance may indicate that most short and intermediate bond funds were underweighting duration going into the second half, and the ensuing bond rally caught active bond managers by surprise.
Yet the SPIVA Year-End 2018 showed consistent underperformance from more than half of the funds in most of the taxable bond fund categories over the mid- and long-term periods. For example, as of the end of 2018, more than 50% of such funds underperformed their benchmarks on five-year net return. This divergence between short- and long-term relative performance by taxable bond managers is not unique in the history of SPIVA.
Exhibit 3 shows the percentage of fixed income funds underperforming benchmarks historically on one-year and five-year bases, where the red text indicates years when more than 50% of the funds lagged benchmarks. More than 50% of the funds outperformed their benchmarks occasionally over the one-year basis, but it was less common over the five-year horizon.
The latest SPIVA U.S. report shows that more than 50% of short and intermediate bond funds underperformed their benchmarks after outperforming six months ago. Our analysis shows that on a five-year return basis, such a switch of relative performance was unusual, as underperformance was persistent.