Conditioning Information and European Bond Fund Performance

In this paper we investigate the performance of European bond funds which, as far as we are aware of, have not yet been studied. Both unconditional and conditional models are used to evaluate fund performance. As conditioning information we use variables that we find to be useful in predicting bond market returns in the European Market. We also test the sensitivity of bond fund performance to single and multiple benchmarks. The results show that, in general, bond funds are not able to outperform passive strategies. The negative performance is more evident for bond funds in Italy, Spain, Portugal and also for UK "Gilt" funds. For most German funds and UK "Corporate" and "Other Bond" funds and also for several French funds we cannot reject the hypothesis of neutral performance. These findings are robust to whatever model (unconditional versus conditional and single versus multi-index) we use. In general, the multi-index model seems to add some explanatory power in relation to the single-index model. Furthermore, when we incorporate the predetermined information variables, we can observe a slight tendency towards better performance, in particular for the multi-index model. This evidence is consistent with previous studies on stock funds and comes in support of the argument that conditional models might allow for a better assessment of performance. However, our results suggest that the impact of additional risk factors seems to be greater than the impact of incorporating predetermined information variables.