Bond Investors Underperformed Despite A Bull Market. Now What?

Bonds have been in a secular bull market for forty years, and bond investors have reaped the benefits. Or have they?

Bond investors benefitted from secularly falling interest rates, but their active management within the overall fixed-income market detracted significantly from their returns. Recently updated data from Dalbar show bond investors, like equity investors, tend to buy high and sell low. As a result the “typical” active individual fixed-income investor has secularly underperformed virtually any buy-and-hold fixed-income strategy.

We believe that we are at the start of a pro-inflation paradigm shift, which will challenge traditional buy-and-hold fixed-income investing. If active individual fixed-income investors performed so terribly during a secular bull market, it seems quite a challenge to expect them to perform well during a less advantageous secular period.

A history of poor active management

The annual DALBAR study that estimates investors’ performance was recently released for 2021. Investor returns are calculated by DALBAR using the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. RBA then analyzed DALBAR’s results to see how the “Average Fixed Income Investor” would have performed over the past 3, 5, 10 and 20 years. RBA compared the DALBAR fixed income fund investor returns with those of different fixed income asset classes and sub-classes for the 3, 5, 10 and 20-year periods ending December 31, 2021.

Chart 1 shows the annualized returns of various fixed-income asset and sub-asset classes over the past 20 years. The only requirement for outperformance during the period was a willingness among fixed-income investors to take risk because bets on both long-duration and credit significantly outperformed. The top three performing classifications were 30-year zero-coupons, EM sovereigns, and US high yield.

However, Dalbar’s “typical” investor actually underperformed cash. Their timing decisions were so poor that they underperformed any buy-and-hold strategy in any fixed-income classification. Essentially, investors simply needed to pick one fixed-income category and hold to perform better than they actually did.