Betting on bond managers

Why try beating the market?

Investors have asked that question with increasing frequency in recent years, usually in relation to mutual funds. Rather than investing in a fund where the manager tries to pick winning stocks and avoid losing ones, investors have opted instead for low-cost funds that track the S&P 500 and other indexes.

Index funds have largely been better performers than their actively managed rivals — a big part of the reason investors poured $504.8 billion into index funds last year, while pulling a net $340.1 billion out of actively managed funds.

Investors still trust fund managers to pick the right investment in bonds, however. With the Federal Reserve on track to keep raising rates, investors are hoping to profit from fund managers’ expertise. Rising rates mean falling prices for existing bonds, because their yields are less attractive than those of newly issued bonds.

Roughly 40 percent of intermediate-term, investment-grade bond funds have better 10-year returns than a relevant benchmark index, according to S&P Dow Jones Indices. Compare that to the 15 percent of U.S. largecap stock funds that have beaten the S&P 500.