Morningstar Magazine - August/September 2018 - 39

EXHIBIT 2

₁, ₂, ₃, ₄, ₅ =
sensitivity to intermediate-term duration,
long-term duration, investment-grade credit,
high-yield credit, and residual market risk,
respectively.

Similar ETFs These exchange-traded funds offer similar exposure to the indexes
behind the factors.

I applied this model to every surviving actively
managed mutual fund in the intermediateterm bond category over the trailing five, 10, and
15 years through April.
Controlling for Risk, Fewer Funds Outperform

Before controlling for risk, active managers in
the intermediate-term bond category have
a respectable record over the past five and 10 years
( E X H I B IT 3 ). About 47% of the actively managed
funds in the intermediate-term bond category that
were available to investors 10 years ago (at
the beginning of May 2008) went on to survive and
beat the Agg. Of the funds that survived that
period, 75% beat that bogy. That said, investors
didn't know which funds would survive ahead
of time, and those that did not were more
likely to have poor performance. The beat rate was
lower over the 15-year window and higher
over the past five years, partially due to differences
in survivorship rates over those periods.
This data doesn't tell the whole story, because
some managers may have taken greater
risk than the benchmark to beat it. The regression
model revealed that fewer funds in each
window outperformed after controlling for their
exposure to common risk factors. For example,
the rate of outperformance for surviving
funds over the past 10 years dropped to 56% in the
regression model from 75% in the simple
index comparison exercise. This suggests that
many active managers who beat the Agg
did so by taking greater risk, which can be done
more cheaply through passive alternatives.

Factor

ETF

Ticker

BBgBarc US Treasury 3-10 Yr Idx

Vanguard Intermediate-Term Treasury ETF

VGIT

BBgBarc Long Term US Treasury Idx

Vanguard Long-Term Treasury ETF

VGLT

BBgBarc US Corp Bond Idx

Vanguard Total Corporate Bond ETF

VTC

Markit iBoxx Liquid High Yield Idx

iShares iBoxx $ High Yield Corp Bd ETF

HYG

BBgBarc US Treasury Idx

iShares US Treasury Bond ETF

GOVT

1-Month Treasuries

SPDR BBgBarc 1-3 Month T-Bill ETF

BIL

Source: Morningstar Direct, French Data Library.

EXHIBIT 3

Success Rates Before controlling for risk, active managers in the intermediate-term
bond category have a respectable record over the past five and 10 years. But the
percentage of funds with positive alpha was significantly lower.
% of Funds That Beat the Agg

% of Funds With Positive Alpha

% of
Starting Funds

% of
Surviving Funds

% of
Starting Funds

% of
Surviving Funds

Survivorship Rate

5 Years

55.7

65.3

29.9

35.1

85.2

10 Years

46.9

75.4

35.0

56.3

62.2

15 Years

29.3

61.8

23.2

48.8

47.5

Period

Data as of 04/30/2018.
Source: Morningstar Analyst's Calculations.

EXHIBIT 4

Factor Regression Median Results Our analysis shows that active bond managers
took on greater credit and interest-rate risk than the Agg over the past 10and 15-year periods but that they dialed back their risk over the past five years.
Factor

5-Year

10-Year

15-Year

Alpha

-0.01

0.01

0.00

Intermediate Duration

0.98

1.01

1.03

How Do Active Managers' Risk Profiles Differ
From the Agg's?

Long Duration

0.92

1.06

1.03

shows the median results of the
regression analysis for the active managers in the
intermediate-term bond category over the
trailing five, 10, and 15 years through April. The
figures next to the risk factors show how sensitive
the median fund is to those risks. A value of 1
would indicate that the median active fund has

Investment-Grade Credit

1.11

1.21

1.25

High-Yield Credit

0.99

1.18

1.12

Residual

0.95

1.09

1.10

Adjusted R-Squared

0.96

0.90

EX H I B I T 4

Data as of 04/30/2018.
Source: Morningstar Analyst's Calculations.

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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018