What variables should
fixed income investors consider when buying a bond mutual fund? According to a
new study by the Schwab Center for Investment Research(R),
maturity, credit quality, expenses and past performance are the key factors
that will help investors make a smart bond fund decision.
The study, "Bond Mutual Funds: What Matters When Selecting a Fund,"
looked at the performance of corporate, government and municipal bonds from
1992-1999 to determine which publicly available variables help explain the
subsequent performance of domestic bond mutual funds. While equity mutual fund
performance has been a popular research topic, few previous studies have
looked in-depth at the factors that affect the performance of bond funds,
which have about $800 billion in assets under management, as of July 31, 2000.
"As investors
decide to incorporate a fixed-income product into their portfolio, it is
important that they evaluate funds according to simple criteria: fees, risk
and past performance," said Jim Peterson, vice president, Schwab Center
for Investment Research. "Based on our research, these are the crucial
factors to consider when looking for bond funds that may outperform their
peers in the future."
Among the study's key findings:
-- Bond fund investors who realize the difficulty in forecasting movements in
interest rates and default spreads and, therefore, don't try to, should
diversify across funds with different target maturities and credit quality.
Within maturity and credit-quality categories, investors should focus on funds
with good past risk-adjusted performance and low expenses.
-- Bond fund investors who believe in their ability to forecast rates and
spreads should select low-cost funds with good track records in their
preferred bond fund categories.
The Schwab Center for Investment Research (SCIR), a division of Charles Schwab
& Co., Inc., was founded in 1997 to provide individual investors with
professional-quality decision-making tools, including quantitative mutual fund
analysis and in-depth strategic research.
Past performance is no guarantee of future results Prospectuses containing
more complete information including management fees, charges and expenses are
available from Schwab. Please read the prospectus carefully before investing.
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