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Journal of Economics and Finance

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04-03-2021

Fixed income mutual fund performance during and after a crisis: a Canadian case

Authors: Laleh Samarbakhsh, Meet Shah

Published in: Journal of Economics and Finance | Issue 4/2021

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Abstract

This study investigates the performance of the fixed income mutual funds industry, focusing on Canadian fixed income funds before, during, and after the 2008 global financial crisis. After recessionary shocks, investors look for ways to diversify their systematic risks. We investigate Canadian fixed income funds’ excess returns and dollar fund flow and show that the funds significantly underperform bond markets throughout the study period after controlling for fund characteristics and macroeconomic factors. Consistent with previous studies, we find that this underperformance is more apparent during market downturns. Indicating a spiral relationship, these results suggest that institutional investors perform poorly during financial crises, which is also observable in the volatility patterns in dollar fund flow. We also find that the flow is positively related to the crisis period, indicating that the dollar fund flow in fixed income funds reported a positive value during the recession, signifying an inflow.

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Available only for authorised users

Long-term debt trading funds that have an above-average risk profile.

Risk of a stock based on the overall market. The greater the risk, the higher the beta.

Investment Company Institute. 2019. “Annual Report for Members”. Accessed November 15, 2019. https://www.ici.org/pubs/annuals.

Small businesses that have a market cap between $300 M and $2B, measured by the stock price and any outstanding shares.

Medium-to-large businesses that have a market cap of over $5B.

This model is used to price assets given their current risk level. It measures the expected return on an asset given the market risk-free rate and the market risk premium.

Low-grade mutual funds must have most of their portfolio invested in corporate bonds rated BAA or lower by Moody’s or by Standard & Poor’s Index. In this case, bonds classified as low-grade have higher yields because the risk of default is higher. (The opposite is true for high-grade rated bonds.)

Index used to compare performance outside of North America. EAFE stands for “Europe, Australasia, Far East.”

Market efficiency is reached when the market has the knowledge necessary to evaluate the prices of stocks. This would mean that stocks are neither undervalued nor overvalued.

Active managed funds are those in which a manager or team of managers makes regular decisions to invest funds for their clients.

See Exhibit A in the Appendix for a breakdown of categories.

See Exhibit B in the Appendix for a breakdown of Canadian equity and global fixed income funds.

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Title: Fixed income mutual fund performance during and after a crisis: a Canadian case
Authors: Laleh Samarbakhsh
Meet Shah
Publication date: 04-03-2021
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2021
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-021-09541-z

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