Most empirical studies suggest that mutual funds do not persistently outperform an appropriate benchmark in the long run. We analyze this lack of persistence in terms of two equilibrating mechanisms: fund flows and manager changes. Using data on actively managed US equity mutual funds, we find that if neither mechanism is operating, winner funds (top-decile ranked in previous year) continue to significantly outperform loser funds (bottom-decile ranked in previous year) by 4.08 percentage points per annum. However, the difference between previous winner and loser funds declines to zero within one year if the two mechanisms are acting together. Thus, equity mutual fund out- and underperformance are unlikely to persist in well-functioning financial markets.
|Number of pages||7|
|Journal||Review of Finance|
|Early online date||17 May 2017|
|Publication status||Published - Aug 2018|
- AF Financial Markets
- unit trusts
- fund flows
- manager turnover
- fund manager
- fund performance
- Manager skills
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Professor Ian Tonks
- School of Accounting and Finance - Professor of Finance