In my previous articles in this series on which mutual fund categories reward active or passive investing approaches, we’ve analyzed all the core equity categories, such as U.S. Large Cap, SMID Cap, and Foreign Large Cap.
So I decided to jump to the fixed income side of the portfolio, as the emerging market equity screening generated no index funds from the institutional space. Bond market –here we come! Keep in mind I’m using Morningstar Direct as my source of screening, testing and research on return/expense data points.
So how does the U.S. Intermediate-term Bond space fare in the debate? My points of fund screening include the following:
- Morningstar Category = Intermediate-Term Bond
- Fixed Income/Style Box (Long) = Medium
- Investment Area = United States of America
- Fund Inception Date = < 12/31/1999 (For a true picture of a 15-year return period comparison, as anything shorter than 10 years, I believe, can easily be misinterpreted.)
- Fund Share Class = Institutional Only
The results of the data search provided a total of 49 mutual funds. My data-points screening below indicates that of those 49 funds, only one was an Index Fund, and zero were Enhanced Index Funds, leaving 48 actively managed funds.
- Indexed Funds = Yes or No
- Enhanced Indexed Fund = Yes or No
- Total Return Annualized 5 years trailing (Month End 8/31/15)
- Total Return Annualized 10 years trailing (Month End 8/31/15)
- Total Return Annualized 15 years trailing (Month End 8/31/15)
Again, to clarify, I believe it’s important to define one data point used above. Morningstar defines its Total Return Annualized as a return, net of any management, administrative, 12b-1 fees and other costs taken out of the fund’s assets, and doesn’t include sales loads or redemptions fees.
Of course, institutional share class funds generally have no sales loads; so therefore, I think we can assume the 5-, 10- and 15-year returns analyzed to be true total NET returns.
The following chart examines how well the passive vs. active funds argument pans out for the Institutional U.S. Intermediate-term Bond space: