On the Valuation Skills of Corporate Bond Mutual Funds

Abstract

We introduce a novel measure to assess the valuation skills of investment-grade corporate bond funds. Our measure recognizes funds ex-ante holding a higher fraction of underpriced bonds as having better valuation skills. The measure predicts future fund performance, is stable over time, and is unrelated to other sources of skill. Fund investors recognize such skill by responding more to the past performance of funds with better valuation skills. Consistent with the equilibrium model of Gârleanu and Pedersen (2018), our evidence suggests that as growing capital gets allocated to skilled bond funds, the investment-grade corporate bond market is becoming more efficient.