The cost of 'dynamism'

Summary: Dynamic bond funds promise to do the rate-timing for you. The record shows they have mostly done it late, raising duration after rates fell and cutting it after they rose. The flexibility is real. The timing rarely is.

Summary: Dynamic bond funds promise to do the rate-timing for you. The record shows they have mostly done it late, raising duration after rates fell and cutting it after they rose. The flexibility is real. The timing rarely is. Dynamic bond funds make a tempting pitch: leave the interest-rate calls to the fund manager. Unlike short-, medium- or long-duration funds, they are free to move across maturities, buying longer-dated securities when rates are expected to fall and shifting to shorter-maturity paper when rates look set to rise. That flexibility should make them one of the smarter corners of the debt-fund market. In practice, the record is less flattering. The category has struggled to keep pace even with short-duration funds, the plain-vanilla anchor of many debt portfolios. Over the last three years, a stretch that covers nearly the full leg of falling rates, only four of 23 dynamic bond funds beat the average short-duration debt fund. Over five years, the underperformance largely holds. And over the recent one-year period, even the best dynamic bond fund barely edged an ordinary short-duration fund. Why the underperformance A dynamic bond fund has one