On the valuation skills of corporate bond mutual funds.

This article focuses on the development and validation of a novel measure called the Valuation Accuracy Score (VAS) to assess the valuation skills of investment-grade (IG) corporate bond mutual funds. Exploiting the unique feature that many firms issue multiple bonds, the authors identify temporarily mispriced bonds by isolating residual credit spreads unexplained by firm fundamentals and bond characteristics. VAS quantifies a fund's skill by the dollar fraction of underpriced bonds held relative to overpriced bonds, and it robustly predicts future fund performance, primarily through superior bond selection rather than timing or trading-cost advantages. The measure is persistent over time, distinct from other known skill metrics, and investors respond by chasing past performance more aggressively in funds with higher VAS, exhibiting a convex flow–performance relationship. These findings contribute to understanding the investment abilities of corporate bond funds and investor behavior toward skilled active management in this market segment.