Disappearance and Survivorship Bias of Corporate Bond Funds

Abstract

This is the first paper analyzing the determinants of success and failure on the corporate bond fund market in terms of surviving vis-a-vis disappearance, generating superior performance and attracting investor flows in a consistent framework. Using a large and comprehensive sample of US corporate bond funds with daily returns over a 28-year period, we show that mutual funds optimize fee revenues rather than performance as corporate bond fund investors are relatively fee insensitive. Thus, size, flows and expenses are the most important determinants of survival. Performance only plays a role for the survival of small funds while large funds survive independently of performance. Regarding success in terms of performance, corporate bond funds exhibit short term performance persistence and suffer from diseconomies of scale, however not as severe as equity funds.