BOND MANAGERS NEED TO TAKE MORE RISK

The information ratio (active return to active risk) measures the pote ntial value-added by active management. High information ratios requir e both skill (an edge on every bet) and breadth (the opportunity to ap ply that skill many times over). Empirical analysis of bond mutual fun ds shows that top-quartile managers have positive information ratios b efore fees, but negative information ratios after fees, and that media n active risk levels are low. The author argues that managers need to take more risk to maximize expected after-fee performance. Active dura tion management typically generates high risk but low information rati os. The author's analysis of potential strategies points toward opport unistic sector rotation and international investing as most promising.