Performance persistence of fixed income funds droms

JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 347

PERFORMANCE PERSISTENCE OF FIXED INCOME
MUTUAL FUNDS
By William G. Droms and David A. Walker*

Abstract
The "winner-winner, winner-loser, gone" methodology allows tests for short-term performance
persistence for government and corporate fixed income mutual funds from 1990 to 1999. Persistence
occurs when “winner” (loser) funds remain “winner” (loser) funds. If intermediate-term (long-term)
bond returns are higher than long-term (intermediate-term) bond returns for successive years, the z-
statistic is positive. Persistence is negative in the opposite case, and the pattern holds for longer lag
periods. Statistical significance and consistency between the sign of persistence and bond returns
indicates persistent returns on bond funds, but the nature of persistence is driven by changes in
interest rates. (JEL G11)

Introduction

This study provides an analysis of performance persistence of fixed income mutual funds. Fund
performance is defined to “persist” if, for consecutive time periods, the fund return is above (below)
the median of all funds after being above (below) the median in the previous period. Studies by
Grinblatt and Titman (1992), Hendricks et al. (1993), Goetzmann and Ibbotson (1994), Brown and
Goetzmann (1995), Malkiel (1995), Elton et al. (1996), Carhart (1997), and Droms and Walker (2001)
have tested the persistence of equity mutual fund total returns over time periods ranging from 10 to 31
years. Grinblatt and Titman (1992) find evidence that differences in performance between funds persist
over time and that this persistence is consistent with the ability of fund mangers to earn abnormal
returns. Hendricks et. al. (1993) find that the relative performance of no-load, growth-oriented mutual
funds persists in the near term, with the strongest evidence for a one-year time horizon. Goetzmann
and Ibbotson (1994) find strong evidence that past mutual fund performance predicts future
performance. Their data suggest that both "winners" (funds with returns above the median) and
"losers" (funds with returns below the median) are likely to repeat, even when performance is adjusted
for relative risk. Brown and Goetzmann (1995) find that relative risk-adjusted performance of mutual
funds persists but that persistence is mostly due to funds that lag the S&P 500; the implication of their
results for investors is that the persistence phenomenon is a useful indicator of which funds to avoid.
Malkiel (1995) finds that funds in the aggregate have underperformed benchmark portfolios even
before deduction of expenses and that while considerable performance persistence existed during the
1970s, there was no consistency of performance during the 1980s. Elton et al. (1996) find that risk-
adjusted performance tends to persist; funds that did well in the past tend to do well in the future.
Using Jensen's alpha as a measure of risk-adjusted performance, their paper shows that primarily one-
year alphas provide information about future performance and that portfolios based on past
performance significantly outperform equally weighted portfolios of funds. Carhart (1997) develops a
31-year data sample free of survivor bias and demonstrates that common factors in stock returns and
investment expenses almost completely explain persistence in equity mutual funds’ mean and risk-
adjusted returns; his results do not support the existence of skilled or informed mutual fund managers.

*McDonough School of Business, Georgetown University, Washington, DC 20057; dromsw@msb.edu; walkerd@msb.edu.
The authors would like to acknowledge the research assistance of Michael Serra and Michael Wieczorek. This research was
supported in part by the McDonough School of Business and the Capital Markets Research Center at Georgetown University.

348 JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006

Droms and Walker (2001) find strong short-term performance persistence for international equity
funds, but no performance persistence for holding periods of two, three, or four years.
These persistence studies focus on equity mutual funds. There is very little published on the
persistence of fixed income mutual funds. Most of the recent literature, such as Busse (2001), Choi and
Murthi (2001), and Wermers (2000), focus on performance of stock mutual funds. Chan et al. (2003)
examine the persistence of long-term stock growth rates on the basis of median operating performance.
Several other recent papers, such as ter Horst and Verbeek (2000), examine various properties of
performance measures and estimators. The current study examines performance persistence of fixed
income mutual funds. The null hypothesis is that there is no persistence between time periods. Whether
or not new funds enter the market, winners in period t are examined to test whether they are winners in
period t+j, for j=1,2,3,4.

Methodology

Research Issue
This study applies the successive “winner-winner, winner-loser” methodology applied in
Goetzmann and Ibbotson (1994), Brown and Goetzmann (1995), and Malkiel (1995). Funds are
ranked ordered by one-year total returns with 50 percent of the funds with the highest returns labeled
“winners” and 50 percent of the funds with the lowest returns labeled “losers.” Funds that ceased
operations in the subsequent year are identified as “gone.” Two-by-three tables are constructed to
identify funds that are “winners” and “losers” in one year and then “winners,” “losers,” or “gone” in
successive years. Persistence is measured by whether winners in one period remain winners in the next
test period. Statistical significance tests (z-scores) are employed following the procedure described in
Brown and Goetzmann (1995).

Approach
To examine the persistence of returns for N funds, the returns are rank ordered from the lowest
return R1 to the highest return RN so that the returns form the vector, R = [R1 , . . . , R.5N , R.5N+1, . . .,
RN]. The lower half of the returns, R1 , . . . , R.5N , define the funds that are “losers” and the upper half
of the returns, R.5N+1, . . . RN, designate the funds that are called the “winners.” Funds with returns
equal to the median are also called “winners.” Let L = [R1 , . . . , R.5N] and W = [R.5N+1, . . ., RN].
If only these same funds operate for the next period, the definition of persistence is quite simple. In
that case, each element of L either remains in the lower half of the returns or shifts to the upper half of
the returns. Likewise, each element of W remains a member of W or does not have returns among the
top half of the rank ordering. If a fund is in L for consecutive periods, it is defined as a loser-loser
(LL). If a fund remains in the upper half of the returns, it is a winner-winner (WW). A fund that shifts
from L to W is a loser-winner (LW) and a fund that shifts from W to L is a winner-loser (WL). Funds
that cease operations that were “winners” (“losers”) during the previous period are designated as
winner-gone (WG) or loser-gone (LG). In matrix form, the path can be described as period t+1

winner loser gone
winner WW WL WG
period t
loser LW LL LG

The classification is somewhat complex for two reasons. Between periods t and t+1, there could
be an increasing number of funds or funds could close. Suppose M new funds are operating in period
t+1, then M+N funds are to be ranked. If K funds close, M+N-K funds are to be ranked. After the
M+N-K funds are ranked, the winners from period t are identified as winners again or losers and the


losers from period t are identified as repeat losers or winners. The funds that are new in period t+1 are
ranked, but the matrix path will include only the funds that operate in the consecutive periods.

Data
Annual mutual fund data are collected for a total of 797 corporate and government fixed income
funds that were in operation during the 10-year period from 1990 through 1999. There were a total of
314 funds operating at the beginning of 1990; 175 were government funds and 139 were corporate
funds; 271 funds ceased operations over the 10-year period while 483 new funds began operations.
The data set consists of annual total return data on these funds from the annual Wiesenberger
Investment Companies Service. Returns are measured as the percentage annualized total rate of return
for the fund (treating all dividends as reinvested), net of fees and expenses and before load charges,
where applicable.

Fund Characteristics
Table 1 provides the general characteristics of the data set. The average numbers of government
and corporate funds over the period were 219 and 247, respectively. The maximum numbers of funds
were 255 government funds in 1995 and 316 corporate funds in 1998. By the end of 1999, the number
of government funds had declined to 221, 15 percent below its 1995 peak, while the number of
corporate funds remained near its peak.

Table 1: Bond Fund Returns

Mean, Median and Benchmark Returns (%): 1990-1999
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Mean
Number of New Government Funds n.a. 9 16 42 48 34 23 10 8 3 21
Number of "Gone" Government Funds n.a. 11 7 14 14 23 26 20 18 14 16
Total Number of Government Funds 175 173 182 210 244 255 252 242 232 221 219
Mean Total Return on Government Funds 7.89% 13.99% 6.14% 8.46% -3.39% 15.57% 2.77% 7.85% 7.64% -1.04% 6.6%
Median Total Return on Government Funds 8.50% 14.00% 6.10% 7.70% -3.20% 15.00% 2.95% 8.00% 7.40% -0.90% 6.6%

Number of New Corporate Funds n.a. 17 19 57 55 60 32 22 21 7 32
Number of "Gone" Corporate Funds n.a. 6 7 9 4 20 21 19 20 18 14
Total Number of Corporate Funds 139 150 162 210 261 301 312 315 316 305 247
Mean Total Return on Corporate Funds 16.09% 15.92% 7.33% 9.95% -3.08% 15.84% 4.03% 8.39% 6.68% -0.27% 8.1%
Median Total Return on Corporate Funds 16.00% 15.80% 7.10% 9.75% -3.30% 16.30% 3.60% 8.40% 7.05% -0.80% 8.0%

Return on Short-Term Treasury Bills 7.81% 5.60% 3.51% 2.90% 3.90% 5.60% 5.21% 5.26% 4.86% 4.68% 4.9%
Return on Intermediate-Term Government Bonds 9.73% 15.46% 7.19% 11.24% -5.14% 16.80% 2.10% 8.38% 10.21% -1.77% 7.4%
Return on Long-Term Government Bonds 6.18% 19.30% 8.05% 18.24% -7.77% 31.67% -0.93% 15.85% 13.06% -8.96% 9.5%
Return on Long-Term Corporate Bonds 6.78% 19.89% 9.39% 13.19% -5.76% 27.20% 1.40% 12.95% 10.76% -7.45% 8.8%

Notes: Benchmark Data from Stocks, Bonds, Bill and Inflation Yearbook 2003, (Chicago, Ibbotson Associates).Table 1 shows the
total number of funds in the sample each year, the number of new funds introduced each year, the mean and median returns on
the funds in the sample, and the comparable return on the benchmark for each year.

Returns
The mean annual return was 6.6 percent on government funds and 8.1 percent on corporate funds;
the median returns were virtually the same. There was high variance in the returns on both types of
fixed income funds. The range of mean returns on corporate funds was from 16.09 percent in 1990 to
–3.08 percent in 1994. For government funds, the range of mean returns was 13.99 percent in 1991 to
–3.39 percent in 1994.
Benchmark returns on Treasury bills, intermediate-term government bonds, long-term government


bonds, and long-term corporate bonds from Ibbotson Associates are shown in Table 1 to provide a
basis of comparison for bond funds relative to the overall bond market. Bond market returns show
similar patterns to the aggregate groups of bond mutual funds, although percentage variations are
slightly more volatile. The average return on Treasury bills was 4.9 percent over the 1990-99 period,
which was less than the average returns on longer-term bonds and bond funds. The 9.5 percent return
on long-term government bonds was the highest average return among these instruments.

Survivor Bias
One of the key issues to be considered for every time series analysis of mutual fund returns is
potential survivor bias. This bias is minimal in this study because each new fund is added to the
database and merging funds continue to be included. The only bias is that, if any funds closed and did
not merge with an existing fund, that fund would not have returns to be included for the year in which
operations ceased. A total of 271 funds ceased operations while 483 new funds were added.
If a fund in the database merged into another fund also in the database, the surviving fund is
carried forward and the acquired fund is dropped entirely. If a fund in the database merged into a fund
not in the database or if the fund closed, the fund is dropped. Complete total return data were then
assembled for all funds that were in the database during the 10-year period of 1990-1999. Including all
operating funds (new and old) in the returns ranking in each period and separating funds that did not
continue operations avoids virtually all potential survivor bias.

Results
Persistence of Returns
Tables 2 through 5 present the results of persistence tests. For each table, persistence tests are
provided for government bonds in Panel A and for corporate bonds in Panel B. Table 2 provides the
tests for persistence between consecutive periods -- t to t+1. Tables 3, 4 and 5 provide the tests
between periods t and t+2 (two year lag), t and t+3 (three year lag), and t and t+4 (four year lag),
respectively. The significance of persistence of returns is tested by calculation of a z-statistic, which is
distributed normally with a zero mean and a standard deviation of 1.0. A large positive z-statistic is
obtained when a high percentage of the “winners” in one period remain “winners” in the next period
tested. When a high percentage of “winners” in one period become “losers” in the next period, a large
negative z-statistic is found. Small z-statistics are determined when there is no clear pattern in the
returns. If exactly the same winners remain winners and the same losers remain losers between two
periods, the z-statistic would be zero. Statistics are judged at the five- percent level of significance, but
in virtually all cases, the z-statistics are statistically significant at the .01 level, and many are
significant at the .001 level.
Table 2 shows that combined results for a one-year lag period are highly significant and
demonstrate both positive and negative performance persistence among both government bond (Panel
A) and corporate bond (Panel B) funds. Looking at the t+1 data in aggregate, approximately 20
percent of bond fund winners are consecutive winners for both government (374 out of 1,965) and
corporate (447 out of 2,166) bond funds. The two types of funds have comparable percentages among
winner-loser (28 percent), loser-winner (28 percent), and loser-loser (18 percent). Given the
differences in returns from year to year in Table 1, it is surprising to find the similar percentages
moving from one classification to another for both types of funds.
Except for the first period (1990-1991) for government bond funds, the z-statistics for both
government and corporate bond funds are statistically significant. The interesting result is that the
signs of the z-statistics fluctuate from significantly positive to significantly negative and the sign of the
z-statistics are the same for both classes of funds for all pairs of years. Even for the first pair of years
where the z-statistic for government bond funds is not statistically significant, it has the same negative
sign as does the significant statistic for the corporate bond fund in 1990-91. For both classes of funds,


the signs are negative for the first pair of years, positive for the next two pairs, negative for the next
four pairs, positive for one year, then negative for the last pair of years (1998-99). When all of the one-
period differences are combined, the z-statistics are –9.045 and –7.288, respectively, for government
and corporate bond funds. The negative signs indicate that, at least in aggregate, winners in period t
are highly likely to become losers in the next period.

Table 2a: Government Bond Return Persistence: 1 Year Lag
Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- Cross-Product SD Z
Year 1 Year 2 Funds Winner Loser Winner Loser Gone Gone Ratio Statistic
a b c d
1990-91 175 173 9 38 46 44 36 4 7 0.676 0.314 -1.248
1991-92 173 182 16 55 30 31 50 2 5 2.957 0.322 3.366
1992-93 182 210 42 62 24 27 55 5 9 5.262 0.336 4.940
1993-94 210 244 48 14 85 78 19 6 8 0.040 0.386 -8.341
1994-95 244 255 34 24 85 94 18 13 10 0.054 0.346 -8.435
1995-96 255 252 23 32 87 84 26 9 17 0.114 0.305 -7.121
1996-97 252 242 10 34 84 83 31 8 12 0.151 0.293 -6.457
1997-98 242 232 8 88 28 25 83 5 13 10.434 0.315 7.448
1998-99 232 221 3 27 84 84 23 5 9 0.088 0.323 -7.524

Total n 1965 374 553 550 341 57 90 0.419 0.096 -9.045
Total % 100.0% 19.0% 28.1% 28.0% 17.4% 2.9% 4.6%

Table 2b: Corporate Bond Return Persistence: 1 Year Lag
Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- Cross-Product SD Z
Year 1 Year 2 Funds Winner Loser Winner Loser Gone Gone Ratio Statistic
a b c d
1990-91 139 150 17 23 44 49 17 2 4 0.181 0.381 -4.477
1991-92 150 162 19 54 19 21 49 2 5 6.632 0.373 5.071
1992-93 162 210 57 60 18 25 50 3 6 6.667 0.364 5.217
1993-94 210 261 55 25 78 75 28 2 2 0.120 0.319 -6.652
1994-95 261 301 60 33 90 91 27 8 12 0.109 0.299 -7.418
1995-96 301 312 32 47 98 92 43 6 15 0.224 0.256 -5.838
1996-97 312 315 22 61 86 86 60 9 10 0.495 0.237 -2.964
1997-98 315 316 21 98 53 49 95 7 13 3.585 0.245 5.212
1998-99 316 305 7 46 106 106 40 6 12 0.164 0.256 -7.064

Total n 2166 447 592 594 409 45 79 0.520 0.090 -7.288
Total % 100.0% 20.6% 27.3% 27.4% 18.9% 2.1% 3.6%

Notes: Table 2 shows performance persistence with a one-year lag. Winners and losers are ranked relative to the median fund in
year one and re-ranked in year two. Winners are funds with returns above the median and losers are the funds with returns below
the median. Funds ceasing operations are identified as gone.

Tables 3 through 5 show the analogous tests with successive performance lagged by two, three
and four years, respectively. Table 3 indicates an interesting persistence difference across two time
periods, in contrast to single period differences. In Table 3, the aggregate z-statistics for both
government and corporate bond funds are positive and statistically significant in contrast to the
significant and negative z-statistics for one period lags in Table 2. The aggregate z-statistics in Table 3
are 4.668 for government bond funds and 2.770 for corporate bond funds. For the two-year lag periods
reported in Table 3, all of the z-statistics are statistically significant and 9 of the 16 individual z–
statistics are positive, whereas 12 of the 18 z-statistics are negative in Table 2.


Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z
Year 1 Year 3 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic
a b c d
1990-92 175 182 25 51 32 33 41 5 13 0 1.980 0.325 2.103
1991-93 173 210 58 63 16 18 56 8 12 1 12.250 0.390 6.431
1992-94 182 244 90 24 57 45 30 10 16 2 0.281 0.339 -3.750
1993-95 210 255 82 70 23 29 56 12 20 5 5.877 0.332 5.337
1994-96 244 252 57 71 28 29 74 23 19 7 6.470 0.313 5.971
1995-97 255 242 33 94 16 14 86 18 27 1 36.089 0.395 9.074
1996-98 252 232 18 35 74 75 31 17 20 1 0.195 0.296 -5.512
1997-99 242 221 11 27 81 80 22 13 19 0 0.092 0.328 -7.294

Total n 1733 1838 435 327 323 396 106 146 1733 1.631 0.105 4.668
Total % 100.0% 25.1% 18.9% 18.6% 22.9% 6.1% 8.4% 100.0% 100.0%

Table 3b: Table 3b: Corporate Bond Return Persistence: 2 Year Lag
Corporate Bond Return Persistence: 2 year lag
a b c d
1990-92 139 162 36 24 39 44 19 7 7 0 0.266 0.378 -3.509
1991-93 150 210 76 57 13 19 46 5 10 1 10.615 0.411 5.749
1992-94 162 261 112 25 53 45 28 3 7 2 0.294 0.342 -3.587
1993-95 210 301 115 82 16 20 74 7 11 6 18.963 0.372 7.915
1994-96 261 312 92 80 35 32 78 16 20 5 5.571 0.292 5.887
1995-97 301 315 54 108 31 22 102 12 26 2 16.152 0.311 8.943
1996-98 312 316 43 37 96 103 39 21 16 2 0.146 0.270 -7.133
1997-99 315 305 28 42 99 100 39 17 18 3 0.165 0.264 -6.822

Total n 1850 2182 455 382 385 425 88 115 1850 1.315 0.099 2.770
Total % 100.0% 24.6% 20.6% 20.8% 23.0% 4.8% 6.2% 100.0%

Notes: Table 3 shows performance persistence with a two-year lag. Winners and losers are ranked relative to the median fund in
year one and re-ranked in year three. Winners are funds with returns above the median and losers are the funds with returns below

Tables 4 and 5 reveal that persistence in the aggregate returns for government and corporate bond
funds is not statistically significant across the 1990 to 1999 period. For three-year lag periods (Table
4), three of the statistically significant z-statistics are positive and four are negative for each category
of fund. For four period horizons (Table 5), half of the z-statistics are significantly positive and half
are significantly negative for each fund category. Comparing government and corporate bond funds,
for each subperiod in Tables 4 and 5, the sign of the z-statistics is the same for the two types of bond
funds; when there is a positive z-statistic for a subperiod for one type of fund, the sign of the statistic
for the other type of fund is the same. For the particular subperiods for three year (Table 4) and four-
year (Table 5) persistence periods, most of the z-statistics are large enough to reject the hypothesis of
no persistence. Of the 14 subperiods examined in Table 4, 12 indicate significant persistence. Of the
12 subperiods identified in Table 5, there was significant persistence for 10 subperiods.


a b c d
1990-93 175 210 67 36 41 41 26 11 20 1 0.557 0.339 -1.726
1991-94 173 244 107 14 58 48 21 15 17 4 0.106 0.396 -5.671
1992-95 182 255 125 56 19 26 43 16 22 14 4.874 0.364 4.356
1993-96 210 252 105 31 56 53 24 18 28 17 0.251 0.333 -4.159
1994-97 244 242 67 28 68 75 20 26 27 16 0.110 0.337 -6.550
1995-98 255 232 41 76 29 27 64 23 36 5 6.212 0.317 5.767
1996-99 252 221 22 83 18 17 81 24 29 3 21.971 0.373 8.294

Total n 1491 1656 324 289 287 279 133 179 1491 1.090 0.117 0.737
Total % 100.0% 21.7% 19.4% 19.2% 18.7% 8.9% 12.0% 100.0%

a b c d
1990-93 139 210 93 26 35 43 16 9 10 3 0.276 0.391 -3.290
1991-94 150 261 131 20 50 42 21 5 12 3 0.200 0.376 -4.280
1992-95 162 301 172 57 18 24 44 6 13 14 5.806 0.371 4.743
1993-96 210 312 147 40 53 49 39 12 17 16 0.601 0.300 -1.700
1994-97 261 315 115 32 75 77 25 24 28 9 0.139 0.312 -6.328
1995-98 301 316 75 85 49 39 75 17 36 7 3.336 0.267 4.517
1996-99 312 305 50 96 33 34 101 27 21 9 8.642 0.283 7.623

Total n 1535 2020 356 313 308 321 100 137 1535 1.185 0.111 1.529
Total % 100.0% 23.2% 20.4% 20.1% 20.9% 6.5% 8.9% 100.0%

Notes: Table 4 shows performance persistence with a three-year lag. Winners and losers are ranked relative to the median fund in
year one and re-ranked in year four. Winners are funds with returns above the median and losers are the funds with returns below


a b c d
1990-94 175 244 116 41 32 19 41 15 27 5 2.765 0.364 2.792
1991-95 173 255 141 54 13 23 43 20 20 19 7.766 0.403 5.090
1992-96 182 252 148 31 40 31 29 20 31 27 0.725 0.352 -0.913
1993-97 210 242 115 58 24 23 51 23 31 29 5.359 0.349 4.806
1994-98 244 232 77 32 56 64 26 34 32 23 0.232 0.321 -4.546
1995-99 255 221 44 25 76 68 18 27 41 10 0.087 0.351 -6.948

Total n 1239 1446 241 241 228 208 139 182 1239 0.912 0.132 -0.694
Total % 100.0% 19.5% 19.5% 18.4% 16.8% 11.2% 14.7% 100.0%

a b c d
1990-94 139 251 148 38 22 16 43 10 10 6 4.642 0.397 3.868
1991-95 150 301 191 50 16 21 38 9 16 15 5.655 0.396 4.380
1992-96 162 312 203 33 40 34 27 8 20 25 0.655 0.349 -1.212
1993-97 210 315 159 70 18 24 59 17 22 25 9.560 0.358 6.299
1994-98 261 316 137 42 58 59 39 31 32 19 0.479 0.289 -2.547
1995-99 301 305 82 37 93 83 27 21 40 17 0.129 0.295 -6.938

Total n 1223 1800 270 247 237 233 96 140 1223 1.075 0.128 0.565
Total % 100.0% 22.1% 20.2% 19.4% 19.1% 7.8% 11.4% 100.0%

Notes: Table 5 shows performance persistence with a four-year lag. Winners and losers are ranked relative to the median fund in
year one and re-ranked in year five. Winners are funds with returns above the median and losers are the funds with returns below


The variation in the period-to-period signs of the z-statistics appears to be attributable to changes
in returns in the bond market. In particular, comparing benchmark bond market returns in Table 1 to
one-year persistence periods in Table 2, the data show that if intermediate-term bond returns are higher
than long-term bond returns for successive years, then the z-statistic is positive. Similarly, if long-term
bond returns are higher than intermediate-term bond returns in successive years, persistence is
positive. This pattern holds for all pairs of years. By contrast, if higher returns on intermediate bonds
are followed by a year of higher returns on long-term bonds, or if higher returns on long bonds are
followed by a year of higher returns on intermediate bonds, then persistence is negative. This pattern
also holds for all pairs of years.
This pattern holds for all pairs of two-, three- and four-year lag periods for which the z-statistic is
statistically significant. There is only one exception to the pattern: government funds in 1990-92, a
period for which the government bond fund z-statistic was opposite in sign from the corporate bond
funds and was not statistically significant.

Summary and Conclusions
This study presents the results of an analysis of fixed income mutual fund performance persistence
for government and corporate bond funds. The study applies the "winner-winner, winner-loser"
methodology developed by Goetzmann and Ibbotson (1994), Brown and Goetzmann (1995) and
Malkiel (1995) to test for short-term performance persistence in government and corporate bond funds
over the 10-year period from 1990 to 1999.
When new funds begin operating, they are included in the analysis so that a funds’ persistence is
ranked relative to all funds, new and continuing, operating in each time period. This appears to make it
more difficult to find statistical significance of persistence. Survivorship bias is minimal in this study
because each new fund is added to the database, merging funds continue to be included and funds that
cease to exist are separated for the analysis. The only bias is that, if any funds closed and did not
merge with an existing fund, that fund would not have returns to be included.
Government and corporate bond funds exhibit remarkable performance persistence. Performance
persistence is statistically significant for all but one of 18 one-year lag periods and the signs of the z-
statistics are the same for both categories of funds. Variation in the period-to-period signs of the z-
statistics appears to be attributable to changes in returns in the bond market. In particular, the data
show that if intermediate-term (long-term) bond returns are higher than long-term (intermediate-term)
bond returns for successive years, then the z-statistic is positive. By contrast, if higher returns on
intermediate (long) bonds are followed by a year of higher returns on long (intermediate) bonds, then
persistence is negative. This pattern of persistence also holds for all pairs of two-, three- and four-year
lag periods for which the z-statistic is statistically significant. There is only one exception to the
pattern: government funds in 1990-92, a period for which the government bond fund z-statistic was
opposite in sign from the corporate bond funds and was not statistically significant.
The combination of high levels of statistical significance and the remarkable consistency in the
relationship between the sign of persistence and bond market returns supports the conclusion that
returns on bond funds are strongly persistent, but that the nature of persistence (i.e., “normal” vs.
“perverse” persistence) is driven by changes in interest rates. As changes in market interest rates cause
market leadership to change (i.e., higher returns to intermediate- or long-term bonds), the nature of
persistence changes. Stability of market leadership is associated with positive persistence while
negative persistence is associated with changes in market leadership.


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