Beating the Bond Market Through Managed Bond Funds

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Beating the Bond Market- WSJ

Over the past year, more than $230 billion has poured into actively managed bond funds.  A mere $63 billion has been invested in indexed bond funds during the same time period.  So why is so much more money being put into managed funds versus index funds?  Last year, 79% of intermediate-term bond funds beat their comparable index fund.  The difference is rather significant- about 1.8 percentage points over the past 12 months.  The long-term managed bond beats the index fund by 2.5 points.  

In the past, bond fund managers struggled just to keep up with the indexes.  Beating them is a boon that no one expected.  That said, however, taking a look at historical returns for the two, should point out to anyone that the managed funds probably cannot beat the indexes forever.  

So why are managed bond funds able to beat indexed funds?  The article points out that indexes don't make an effort to buy the best-performing securities at the time or to avoid the worst... their goal is to mirror everything that is available in the market and to keep prices extremely low.  When a hot bond fund comes to the market, the managed funds can buy into it and take advantage of what is hot at any given moment.  The index fund just keeps on mirroring the index.

It is certainly worthwhile considering the risks before putting all of your money into the managed funds.    With the increased return of the fund, of course, comes an increased risk.  Taking history into account, you may just decide the risk is not worth it and that an index is still the way to go.

For more information about bond funds and their specifics, Fidelity.com provides some interesting information.