- This paper, published in the Journal of Financial Planning in May 2006, presents a summary of all significant past papers since 1992 on the topic of mutual fund performance persistence. It comprehensively reviewed all past significant papers since 1990 in the three most highly-ranked academic journals (Journal of Finance, Journal of Financial Economics, and Review of Financial Studies), including all the references in the most recent papers. It left no reasonable stone unturned.
- Some important findings:
- For the vast majority of equity mutual funds, alpha is not significantly different from zero.
- Beware of survivor bias—it can generate the appearance that winners persist.
- Past performance (raw returns and risk-adjusted returns) does persist, mostly measured within investment style sub-categories, and especially for short-term periods (< 1-year). Evidence of longer-term persistence is weak or non-existent.
- Poor performance persists much more consistently than good performance. Easier to spot and avoid the losers!
- Performance persistence may be explained by expenses more so than by manager skill.
- Morningstar Star Ratings (style-based) seem to a reliable predictor.
- Historical performance should not be the sole or even primary criterion for selecting mutual funds, but it should be one of many factors.
Finished: 5-Jul-10. Rating: 7/10.