The most important thing to understand when evaluating bond funds is that past performance is not indicative of future performance. The primary driver of most bond funds’ performance is interest rates. Interest rates have been falling for the last 30 years, and most bonds (whose price moves in the opposite direction of interest rates) have had fantastic returns during this period as a result.
If interest rates stay in narrow range or rise, this trend is not likely to continue into the future. With that being said there are some important things that you can learn by looking at a bond fund’s historical performance, such as: How is the fund likely to behave under certain market conditions (such as when interest rates move up and down)? How volatile is the fund’s performance likely to be? How much are you likely to receive in income distributions? How skilled is the manager compared to his or her peers? How expensive is the fund? Where can you find a bond fund’s historical performance information?
The most popular venue for reviewing bond mutual fund performance by far is Morningstar.com. Much of the information on the site is free of charge, and all of the information you need to evaluate historical performance is free.
Here is an example of the performance page for the PIMCO Total Return Bond Fund, which is the largest mutual fund in the world. Lets go through each of the historical performance sections and discuss insights they can provide.
The Star Rating: The first thing you see is the name of the fund, its ticker symbol, and its star rating. The star rating system is Morningstar’s way of giving you a quick snapshot of the quality of the fund. The stars go from 1 to 5, with 1 star being the worst and 5 stars being the best. The system is …
