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Are Bond Funds Misreporting Their Portfolio Holdings?

FYI: Do you know what’s in your bond fund’s portfolio? A recent study finds that a surprisingly large number of funds are fudging the data. As a result, one or more of the bond mutual funds you own may be riskier than you think.

“Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky,” report Huaizhi Chen, a finance professor at the University of Notre Dame, and two co-authors in a new study: “Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds.”

The research offers “the first systematic study of bond funds’ reported asset profiles to Morningstar against their actual portfolios.” For investors who hold open-end bond funds, the paper is a wake-up call that makes for disturbing reading.
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