Fund Flows, Manager Changes, and Performance Persistence*

Abstract

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 U.S. 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, mutual fund out-and underperformance is unlikely to persist in well-functioning markets.

Demand and management of mutual funds

“…Portfolios that monthly invest in the previously best performing funds significantly outperform portfolios that invest each month in funds with the previously lowest performance (an overall alpha of 5.11%). Thus, we observe some positive and negative performance persistence in the short run, which is in contrast to the arguments by Berk and Green (2004) and the empirical evidence in Bessler et al (2018). It is, however, consistent with other portfolio optimization strategies that consistently are able to outperform the benchmark (Bessler and Wolff, 2015;Bessler, Opfer and Wolff, 2017;.…”

“…Most of the empirical evidence is, however, based on longer-term equilibrium processes such as fund flows and manager changes (Bessler et al, 2018), but this does not preclude persistence resulting from active management . While acknowledging that profit opportunities often vanish when strategies become publicly available (McLean and Pontiff, 2016), we consider a new perspective on active fund management, by asking whether funds which regularly alter their exposures to systematic factors achieve better performance.…”

Mutual fund performance and changes in factor exposure

“…Those that invest in the previously best performing funds significantly outperform by 511 bps portfolios that invest each month in funds with the previously lowest performance. These findings are linked to the ongoing debate regarding persistence in mutual fund performance (Berk & Green, 2004;Bessler et al, 2018;Keswani & Stolin, 2012;Kosowski et al, 2006).…”

Managerial Skill and European PERE Fund Performance

“…Abnormal returns have previously been used to gauge managerial skill in the mutual fund performance persistence studies (e.g. Bers and Madura 2000;Lin and Yung 2004;Prather et al 2004, Bessler et al 2018, where AR is typically measured as an outperformance (alpha) of the fund compared to a suitable benchmark return, such as S&P 500, Wilshire REIT Index, MSCI World Stock Index or IPD indices. The nature of these vehicles, such as their infinite lifetime and monthly return observations, allows estimating alpha for each fund in the sample.…”