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Performance Persistence
Abstract
The authors explore performance persistence in mutual funds using absolute and relative benchmarks. Their sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A profit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures. Copyright 1995 by American Finance Association.
... To analyse the performance persistence, the non-parametric 2*2 contingency table approach is widely used in literature. Studies like Brown et al., (1992) [6] , Goetzmann & Ibbotson (1995) [6] , Kahn and Rudd (1995) [18] , [19] , Babalos et al., (2008) [2] , Javier Vidal Garcia 2013 [35] , Drosos koutsokostas 2019, Deb 2019) [38] used this approach. This is a common test for persistence to measure the frequency with which winners' and losers' funds maintained that category over consecutive time periods. ...
... To analyse the performance persistence, the non-parametric 2*2 contingency table approach is widely used in literature. Studies like Brown et al., (1992) [6] , Goetzmann & Ibbotson (1995) [6] , Kahn and Rudd (1995) [18] , [19] , Babalos et al., (2008) [2] , Javier Vidal Garcia 2013 [35] , Drosos koutsokostas 2019, Deb 2019) [38] used this approach. This is a common test for persistence to measure the frequency with which winners' and losers' funds maintained that category over consecutive time periods. ...
... There is performance persistence if statistical evidence shows a significantly larger number of repeat winners (WW) and losers (LL) frequencies than in the other two. To avoid the possibility that a high proportion of funds remain in the top ranks by chance, we test all available data and also use different statistical tests to establish the robustness of the possible performance persistence effect contingency table estimates were examined in literature by the use of the repeat winner approach Z test of [19] , the odd ratio or cross product ratio of (Brown and Goetzman, 1995) [6] , and the chi-square statistic of (Kahn and Rudd, 1995) [18] approaches. The null hypothesis for all the above three approaches is that there is no persistence in the performance of mutual funds in India. ...
... Winner WW W L Loser LW LL Brown and Goetzmann [75] calculated the ratio of the product of WW, LL and the product of W L, LW: ...
... In that case, the value of CPR is 1, and Z follows a standard normal distribution, so the Z-statistic can be used to determine whether the performance persistence is statistically significant. Brown and Goetzmann [75] examined the overall performance persistence of WW and LL, whereas Malkiel [16] examines the persistence of fund performance that outperforms the benchmark, i.e., WW. ...
... Bollen et al. [75] proposed the following cross-sectional regression model: ...
The number and size of China’s commercial retirement Fund of Funds (FOFs) have exploded since 2018, reflecting a dearth of Chinese retirement products and widespread retirement anxiety among individual investors. Therefore, the performance of retirement FOFs continues to garner widespread interest from academia and society. This study evaluates the performance and sustainability of the investment strategies employed by China’s retirement FOFs using standard relative and absolute measures. The Sharpe ratio, Treynor ratio, and Jensen’s alpha are used as performance measurement standards, and the sustainability of performance is evaluated using the performance dichotomy, cross-sectional regression, and Spearman rank correlation coefficient methods. Target-risk FOFs for retirement are categorized into four groups: conservative, stable, balanced, and aggressive, with each group assuming progressively greater levels of risk. In evaluating fund performance, it was determined that the aggressive and stable groups of funds generated greater excess returns (as indicated by the inflation-adjusted Sharpe ratio). Additionally, the stable group of funds generated greater investment returns than the other groups (as all statistically significant alpha values for Jensen were positive). When evaluating the sustainability of fund performance, it was determined that the stable and balanced group funds exhibited the least sustainable performance. During the economic recession caused by the COVID-19 pandemic between 2020 and 2021, there were multiple fund performance ranking reversals (with significantly negative cross-sectional regression coefficients and Spearman coefficients). In the second half of 2022, the fund’s performance exhibited signs of sustainability (as indicated by significant performance dichotomy test values and positively significant Spearman coefficients). Still, this trend did not persist into 2023. Summarizing the different performance indicator results reveals that the stable group is the most worthwhile fund group to purchase among the four groups. Also, given that the historical performance of a signal fund is not sustainable, the investors should diversify their investments in this group and try to obtain the average return of the stable strategy to achieve the goal of supplementing retirement.
... Goetzmann and Ibbotson (1994) show that past risk-adjusted performance can predict future performance for the period 1976-1988. Brown and Goetzmann (1995) continue the study examining the same period 1976-1988, with results that suggest an abnormal functioning of USA mutual funds which seems to indicate the presence of persistence. In this regard, they conclude that the persistence appears to be correlated through the managers. ...
... Survivorship bias has been well documented in literature. See Grinblatt and Titman (1989), Brown and Goetzmann (1995) and Malkiel (1995). Nevertheless, the survivorship bias can be offset by collecting data on all the funds in the period under analysis and then calculating the average annual return in the full sample. ...
... The test statistics used to determine the significance of the level of persistence phenomenon are those proposed by Malkiel (1995), Brown and Goetzmann (1995) and Kahn and Rudd (1995). ...
Performance measurement is an area of crucial interest in asset valuation and investment management. High volatility as well as time aggregation of returns, amongst other characteristics, may distort the results of conventional measures of performance. In this work, we study the performance of 115 Spanish Absolute Return Funds in the period 2010-2015, using the Sharpe, Treynor, Jensen and Modified Sharpe ratios. We then apply Data Envelopment Analysis to classify the funds in order to avoid the problems arising from the non-normality of their returns, since non-gaussian returns do not pose a problem in Data Envelopment Analysis implementation. In addition, we apply the Malkiel, Brown and Goetzman test and the Rude and Khan test in annual periods to determine the existence of persistence. Finally, we study the relationship between efficiency and persistence in order to determine the relationship between both measures and to support decision-making processes. The results show a significant relationship between cross efficiency and Modified Sharpe ratios as well as the existence of persistence for annual periods. Nevertheless, the results do not allow concluding any relationship amongst efficiency and persistence.
... The former is the anomaly where experimental estimates of RTP have often shown systematic changes depending on the length of delay in rewards (e.g., with hyperbolic discounting; Strotz, 1955;Pollak, 1968;Laibson, 1997;Barro, 1999;DellaVigna, 2009). The latter is the inconsistency between the average equity risk premium calculated using actual US data and the values of DRA predicted by conventional economic theories (e.g., Mehra and Prescott, 1985;Rietz, 1988;Constantinides, 1990;Brown and Goetzmann, 1995;Kocherlakota, 1996;McGrattan and Prescott, 2003). ...
... The equity-premium puzzle addresses the inconsistency between the average equity risk premium estimated using actual US data and the value of DRA predicted by conventional economic theories (e.g., Mehra and Prescott, 1985;Rietz, 1988;Constantinides, 1990;Brown and Goetzmann, 1995;Kocherlakota, 1996;McGrattan and Prescott, 2003). Before examining this puzzle, I first examine the relation between incomes and the returns on risk-free bonds and equities. ...
A household’s preferences are usually assumed not to vary temporally or depending on the objects to which they are applied, but this assumption is often inconsistent with empirical estimates, for example, with the time-inconsistency problem of the time preference rate and the equity-premium puzzle. I show that these inconsistencies are generated because a household’s preferences vary depending on whether they are applied to permanent or temporary incomes. Preferences applied to permanent incomes are anchored to the steady state or a balanced growth path, but those for temporary incomes are not. Hence, the former is fixed and unchanged, but the latter can take various values depending on conditions.
... However, the results showed no significant persistence in performance when the tests were repeated using 1980s data. Brown and Goetzmann (1995) using one-year holding and formation periods, classified winners and losers according to whether their returns were above or below the median. These results supported Malkiel's finding that persistence of performance is strongly dependent on the time period being studied. ...
... If, for the specific formation and holding period being analysed, these funds were not in existence for the full time period, they were excluded from the sample in that instance. This may have introduced some measure of survivorship bias as discussed by Malkiel (1995) and Brown and Goetzmann, (1995) ...
This study examines persistence of performance in South African general equity and fixed income unit trusts over the period January 1989 to December 1999. The formation and holding periods studied ranged from one quarter to two-years. Significant persistence was found for most combinations of formation and holding periods for risk-adjusted equity unit trusts. It is suggested that choosing equity unit trust winners from the previous two-years and holding them for the next two-years may be the best long-term strategy to adopt. The fixed income unit trusts showed far less significant persistence than the equity unit trusts with loser-loser persistence predominating.
... In predicting customer churn, traditional methods often fall short in capturing the intricate and ever-changing nature of customer behavior. Brown and Goetzmann (1995) point out in their study on mutual funds that poor performance can increase the likelihood of customers leaving, which is a potential factor in customer churn. This viewpoint, however, oversimplifies the problem by presuming that poor performance is the only factor in customer churn. ...
This research embarked on a comprehensive analysis of customer churn prediction in the telecommunication sector using various machine learning algorithms. Primarily, the study concentrated on three algorithms: Logistic Regression, Random Forest, and Gradient Boosting. The performance of these algorithms was gauged on empirical data, revealing varied results. Logistic Regression offered a fundamental approach, often serving as a benchmark in churn prediction tasks. Meanwhile, the ensemble techniques, Random Forest and Gradient Boosting, showcased their prowess in handling large data with many predictors, often outperforming simpler models in intricate tasks. Furthermore, this study delved deep into hyperparameter tuning to amplify the accuracy of the Gradient Boosting and Random Forest algorithms. The results illustrated subtle performance enhancements, albeit the trade-offs in precision and recall became evident. Notably, the Gradient Boosting Classifier, when fine-tuned, displayed an accuracy of approximately 80%, with feature importance highlighting 'Contract', 'tenure', and 'MonthlyCharges' as significant predictors. In contrast, the Logistic Regression algorithm manifested consistent performance, making it a reliable option, albeit lacking the sophistication of ensemble methods. This investigation reaffirms the notion posited by numerous scholars, such as Moro et al. (2014) and Barakat et al. (2020), emphasizing the dynamic nature of machine learning algorithms in predicting customer churn. In conclusion, while each algorithm has its merits, their efficacious application rests heavily on understanding the underlying data and the specific business context. Future directions suggest delving into more advanced algorithms and further feature engineering to bolster prediction accuracy. 3
... Mutual funds performance is well documented in the finance literature. During the 1990s, studies like (Brown & Goetzmann, 1995;Hendricks, Patel & Zeckhauser, 1993;Wermers, 1997;Carhart, 1997) found evidence of persistence over a short-term duration like one to three years. Whereas Elton, Gruber and Blake (1996) reveal little evidence that persistence of performance over the long-term horizon. ...
The present study verifies the short-term persistence performance of equity mutual fund returns. The study considers 47 equity funds' monthly excess returns spanning from January 2000 to December 2019. The study employs prominent asset pricing models such as Jensen (1968) one-factor model, Fama-French (1993) three-factor model, and Carhart (1997) four-factor model to capture the short-term persistence of equity mutual fund returns. The results show that Jensen’s one-factor and Fama-French three-factor models are explaining a better persistence performance in the Indian context.
... Not only did this paper design a nowfamous performance measure called Jensen's alpha, but it also delivered what was then a "swim against the tide" results showing that active investing was not better than passive investing. A while later, several contradictory papers (Grinblatt and Titman, 1992;Hendricks et al., 1993;Goetzmann and Ibbotson, 1994;Brown and Goetzmann, 1995) emerged from highranked journals with favourable support for active investing. These studies found persistent outperformance by asset managers. ...
Purpose
Stirred by scant regard for market phases in portfolio performance assessments, the current paper investigates the active versus passive investment strategies under the bull and bear market conditions in emerging markets focusing on South Africa as a case study.
Design/methodology/approach
Methodologically, the measures of Jensen's alpha and Treynor index are applied to the monthly returns of 20 funds from January 2010 to June 2022.
Findings
The results are enlightening; though they contradict developed market evidence, they are consistent with emerging market trends. The findings show that actively managed funds outperform the market benchmark and passive investing style under bear and normal market conditions. Passive investment strategy outperforms both market benchmark and actively investing style under bull market conditions.
Practical implications
In the face of improved market efficiency, increased liquidity and recent technological impact, the findings of this study have practical application. The study outcomes should inform and update global investors, especially asset managers interested in emerging markets; however, the limitations of the study should also be considered.
Originality/value
While limited studies consider market conditions when comparing and contrasting the performance of passive versus active investing, such consideration is lacking in emerging markets. The current study corrects this literature imbalance.
... Grinblatt and Titman (1992), Brown et al. (1992), Hendricks et al. (1993), Brown and Goetzmann (1995), Goetzmann and Ibbotson (1994), Kahn and Rudd (1995), Malkiel (1995), Elton et al. (1996), andCarhart (1997) conducted studies on the persistence of conventional mutual fund total returns over time. Grinblatt and Titman (1992) found that differences in performance between funds persist over time, and that this persistence is consistent with fund managers' ability to earn abnormal returns. ...
In this study, we provide a comprehensive examination of the performance of financial (specialty sector financial) mutual funds over a 23-year period, a much longer time frame than what has been analyzed in previous literature. To fully understand the performance of these mutual funds, we consider multiple factors, including risk-adjusted performance, both unconditional and conditional multifactor analysis, and market timing and selectivity. Financial mutual funds have higher risk-adjusted performance than the overall market and financial sector benchmarks. However, fund alphas are not different from zero, and managers do not exhibit market timing or security selection abilities. Our analysis not only includes the overall performance of these mutual funds, but we also delve into sub-samples before and after the 2008 financial crisis and during the recent Coronavirus pandemic.
... Principal safety and investor services are priorities. Several research (Blake et al., 1993;Bogle, 1992;Brown and Goetzman, 1995;Brown et al., 1992) have found either a weakly positive or no correlation between historical performance and current returns. Other researchers seem to be more clear about the connection (Grinblatt and Titman, 1992; Hendricks et al., 1993). ...
People can participate in the investment process and generate income by placing their money in a variety of physical and financial assets. Because life is uncertain and the future cannot be predicted, one must invest in order to protect their future. Among other things, investors put money into the market with the hopes of making money, feeling secure, and appreciating their investments. A young investor has a wide range of investment options because, up until the age of 40, he will be able to generate a respectable return on his investment and has a reasonable risk tolerance and time horizon. Numerous investing possibilities are available, such as bank deposits, the equity market, mutual funds, and other financial instruments real estate, post office deposits, and actual gold. The study's major objective is to identify the preferences of young investors—those who are between the ages of 21 and 35—in the contemporary setting. The sentiments of the investors can vary from person to person even within the same age range. The researchers have looked into the various preferences among young investors using an easy-to-complete questionnaire and direct contact with the investors.
... Hendricks, Patel, and Zeckhauser (1993) find evidence of persistence in mutual fund performance over short-term horizons (one to three years) and attribute that to the skills of fund managers, for which they reserved the term "hot hands." Goetzmann and Ibboston (1994), Goetzmann (1995), andGrinblatt, Titman, andWermers (1995) also find evidence supporting the short-term persistence hypothesis and attribute that to common investment strategies. For longer horizons (five to ten years), see the study of Grinblatt and Titman (1992). ...
Extant studies revealed evidence of inconsistent outcome in the study of liquidity and capital structure across different economies. In order to check for settled empirical outcome which enables optimal level of gearing that ensures stable liquidity, this study examines the impact of liquidity on the capital structure of listed conglomerates firms in Nigeria using ex-post facto research design. Hence, 10 years data were extracted from the annual reports and accounts of 5 sampled firms in the conglomerates sector from 2008 to 2017. The data collected were analysed using regression analysis. The study found significant link between current ratio and capital structure of conglomerates. However, a positive and insignificant relationship was found between the quick ratio and cash conversion circle and capital structure in the conglomerates firms. The study concludes that varying the size of current ratio through effective working capital management (especially, inventories) would ensure that gearing is positively utilized as a trade-off for liquidity stability. Lower cash conversion circle though not significant could affect liquidity position when the circle is quicker and cash recovery of debt is enhanced. The study recommends that corporate managers should maximize the benefit accruing to liquidity management through liquidity planning because of its correlation with leverage level and eventual corporate survival and growth.
... On the selectivity, Soo-Wah (2012), Das and Rao (2015), Maroof Et Al (2020), and Surang (2022) noticed good selectivity performance requires lower risk. Nevertheless, Brown, and Goetzmann (1995), and Atta and Marzuki (2019), under H&M model, realized that good stock picking performance is actually associated with higher risk. Meanwhile, Lobão and Gomes (2015) failed to statistically significantly associate risk taking and micro-selection returns. ...
This study contributes to the academic literature on faith-based mutual funds, by offering a comparative investigation of Islamic vs. conventional funds’ performance sensitivity to changes in a list of seventeen relevant funds’ attributes, all in the context of the Saudi market. The performance measures investigated are the excess return, selectivity and timing. The study took place from 2011 to 2015, with a sample of 200 Active Saudi funds, 137 Islamic and 63 conventional. Findings indicated that fund size, management fees, expense ratio cash and price-earnings ratio were irrelevant to both Islamic and conventional fund performances. In addition, we noticed similarities in both Islamic and conventional funds’ performances sensitivities towards turnover, unsystematic risk, investment target, past performance, age and management tenure. They however react differently towards a change in the price-to-book ratio. On the other hand, fund systematic risk, cashflow-to-book ratio and faith factors are exclusively relevant to Islamic funds, while fund growth and objective only affect conventional fund performance. Finally, selectivity and timing appear to be mutually exclusive, suggesting management specialization. This work appears to be the first comparative analysis of its kind. A larger, multi-regional sample, and a longer study period will provide better insights.
... The international evidence of mutual fund performance is also mixed (see for instance Ferreira et al., 2013, Filip and Rogala, 2015, Gallagher, 2003, and Ding et al., 2015. Further, the evidence on mutual fund persistence in performance based on these standard models is also mixed, where persistence is found among losers but not pervasively among winner funds (see for instance Carhart, 1997, Elton et al., 1996, Brown and Goetzmann, 1995. ...
Standard Fama-French-Carhart models define 'winners' as funds that generate the highest excess returns given the factor risks involved; however, they do not provide information on whether such winners are outperforming their prospectus benchmark or their peer group. In addition, existing literature relying on these models, by and large, does not find evidence of persistence in performance. In this paper, we propose a two-stage procedure that allows investors to select "true" winners(losers) which generate the highest factor-risk-adjusted performance relative to the benchmark and the peer group simultaneously. Utilizing both adjustments at the same time results in a strong predictive ability, leading to a selection of funds that persist in performance. Our true winner funds have statistically significant superior benchmark-adjusted alphas, peer group adjusted alphas and Sharpe ratios one year ahead, which are significantly different from those generated by the true loser funds. The results are robust to extended investment horizon, and alpha estimation method, and they are not driven by outliers, size of fund-sorts, or any particular period within our sample.
Examining risk‐adjusted returns for executed trades over horizons of up to 1 year, we document strong evidence of short‐term trading skill using daily mutual fund transactions from Finland. We find that trading performance is highly persistent up to the 1 month horizon, with an annualized Carhart abnormal return of 5.03% observed for both buys and sells. Moreover, the returns observed for the first week account for almost 36% of a fund's 1 year trade return, underscoring the significance of short‐term trading in mutual funds. For the best‐performing funds, this short‐term performance also translates into sustained long‐term outperformance. Investigating possible sources, we find that liquidity provision, rather than price pressure, is a significant contributor. In addition, short‐term trading performance is significantly positively related to trade size, fund size, and expenses, depending on whether buys or sells are considered.
This study examines whether mandatory increase in reporting frequency exacerbates agency problems. Utilizing the setting of the 2004 SEC mandate on increased reporting frequency of mutual fund holdings, we show that increased reporting frequency elevates window dressing (buying winners or selling losers shortly before the end of the reporting period). This effect is driven by low‐skill fund managers’ incentives to generate mixed signals. Funds managed by low‐skill managers experience lower returns, more outflows, and a higher collapse rate when their window dressing is elevated after the 2004 rule change. These results suggest that, although higher reporting frequency on agents’ actions can exacerbate signal manipulations, the related manipulation costs improve sorting among agents in the longer term.
The few studies on COVID-19’s impact on stock market efficiency have reached mixed conclusions. However, the findings lean towards a negative impact, no studies have assessed market efficiency when returns increase in the existing capacity of COVID-19 cases, exchange rates and inflation rates. This study uses data envelopment analysis (DEA) and the DEA-adjusted estimator. We finally adopt the cross and time product ratios to determine the persistence of stock market efficiency. We find that the COVID-19 pandemic severely impacted the efficiency of African stock markets in 2021 and that the efficiency of African stock markets persists only in the short run. These findings are relevant to investors seeking to diversify their portfolios during pandemics and to regulators of African stock markets. Global investors should diversify their portfolios with African stock markets to mitigate the impact of pandemics on their investments. To reap the benefits of diversification, investors should invest in efficient African markets during pandemics and sell stocks in inefficient markets in the short run. In addition, regulators of African stock markets should adopt technologies that aid in the flow of information among investors.
We use the dynamic conditional correlation (DCC) model to estimate daily frequency mutual fund betas. Compared with traditional estimates, daily betas better capture changes in fund risk stemming from daily fund trading activity. Based on these beta estimates and a two-stage estimation procedure, we find significant evidence of market timing ability among actively managed U.S. equity funds that is not apparent via standard approaches. Unlike traditional measures, our timing estimates correlate positively with fund performance. Market timing is especially evident during down markets, with successful timers exhibiting low downside risk. Timing ability persists across time and attracts investor flows.
This paper was accepted by David Sraer, finance.
Funding: This work was supported by the National Natural Science Foundation of China [Grants 72173127 and 72121001] and by the Institute for Industrial Innovation and Finance at Tsinghua University.
Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4857 .
We investigate the relation between observable managerial characteristics (i.e., gender, age, tenure, professional qualifications, and advanced education) and performance in diversified equity mutual funds domiciled in the Eurozone. We find that differences in the fund alphas are statistically significant only in the cases of groups based on age, tenure, and professional qualifications (i.e., CFA). We also find a significantly positive relation for age and the CFA certification with a fund’s risk-adjusted performance and a significantly negative relation for tenure. But we find no significant effect for gender and an advanced education (i.e., MBA). The differences in risk-taking are only significantly related with age and tenure; the former has a negative and the latter has a positive relation with risk-taking, respectively.
https://www.sciencedirect.com/science/article/pii/S0927538X22002207?dgcid=author
We examine different aspects of performance persistence of US hedge funds over different business cycles and stock market regimes. During periods of economic growth and bull stock markets, we report performance persistence for up to one year in the risk-adjusted returns of fund portfolios of different investment strategies, which is mainly driven by top fund performers. Performance persistence weakens dramatically during recession periods and bear stock markets. Our results are robust to different combinations of states of economic growth and stock market regimes. Trading strategies constructed on the basis of our results confirm the economic significance of our findings.
We examine the effect of investor service costs on mutual fund performance. Benchmarking passive funds against ETFs managed by the same fund company with the same investment objectives, we show that passive funds on average underperform ETFs by 42 bps in annualized net returns, of which about 90% can be attributed to investor service costs. Further benchmarking active funds against passive funds, we show that active funds on average outperform passive funds by 31 bps in annualized gross returns. However, the higher expense ratios charged by active funds lead to about 28 bps of underperformance in annualized net fund returns.
By providing a solid theoretical basis, this book introduces modern finance to readers, including students in science and technology, who already have a good foundation in quantitative skills. It combines the classical, decision-oriented approach and the traditional organization of corporate finance books with a quantitative approach that is particularly well suited to students with backgrounds in engineering and the natural sciences. This combination makes finance much more transparent and accessible than the definition-theorem-proof pattern that is common in mathematics and financial economics. The book's main emphasis is on investments in real assets and the real options attached to them, but it also includes extensive discussion of topics such as portfolio theory, market efficiency, capital structure and derivatives pricing. Finance equips readers as future managers with the financial literacy necessary either to evaluate investment projects themselves or to engage critically with the analysis of financial managers. Supplementary material is available at www.cambridge.org/wijst.
This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM and extend it to the APT. We find that this timing test is misspecified due to noninformation-based changes in mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes true timing ability from noninformation-based beta changes.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength of the evidence favoring return predictability.
We investigate the informational efficiency of mutual fund performance for the period 1965–84. Results are shown to be sensitive
to the measurement of performance chosen. Wefind that returns on S&P stocks, returns on non-S&P stocks, and returns on bonds
are significant factors in performance assessment. Once we correct for the impact of non-S&P assets on mutual fund returns,
wefind that mutual funds do not earn returns that justify their information acquisition costs. This is consistent with results
for prior periods.
Recent evidence suggests that past mutual fund performance predicts future performance. We analyze the relationship between
volatility and returns in a sample that is truncated by survivorship and show that this relationship gives rise to the appearance
of predictability. We present some numerical examples to show that this effect can be strong enough to account for the strength
of the evidence favoring return predictability.
We present evidence from questionnaire responses of mutual fund investors about recollections of past fund performance. We find that investor memories exhibit a positive bias, consistent with current psychological models. We find that the degree of bias is conditional upon previous investor choice, a phenomenon related to the well-known theory of cognitive dissonance. Psychological and economic frictions in the mutual fund industry are examined via a cross-sectional study of equity mutual funds. We find an unusually high frequency of poorly performing funds, consistent with investor "inertia." We also examine the differential responses of investment dollars to past performance, controlling for supervisorship. These show that the effect is confined to the top quartile. We find little evidence that the response to poor performance is unusual.
Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enables the author to more precisely examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s. Copyright 1995 by American Finance Association.
The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfoli os is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a differen t (previously used) data set and with some post-1988 data confirm the finding of persistence. Copyright 1993 by American Finance Association.
The main goal in this paper is to gauge the sensitivity of conventional measures of abnormal mutual-fund performance to the benchmark chosen to measure normal performance. The authors employed standard CAPM benchmarks and a variety of APT benchmarks to investigate this question and found little similarity between the absolute and relative rankings implied by them. Hence, both the model for risk and return and the method used to construct the APT benchmark are important choices in this context. Finally, the authors found statistically significant measured abnormal performance using all benchmarks. The economic interpretation of this phenomenon appears to be an open question. Copyright 1987 by American Finance Association.
The use of predetermined variables to represent public information and time-variation has produced new insights about asset pricing models but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. The authors modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in the authors' sample look better. Copyright 1996 by American Finance Association.
This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. The authors find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Copyright 1992 by American Finance Association.
Survivorship and the ‘u’ shaped pattern of response
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Aber 1991 Lessons from the growth history of mutual funds, Working paper
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Lessons from the growth history of mutual funds, Working paper
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