X-Message-Number: 9780
Date: Tue, 26 May 1998 09:13:27 -0700 (PDT)
From: Doug Skrecky <>
Subject: mutual fund performance

The Journal of Finance LII(1): 57-82 March 1997

"On Persistence in Mutual Fund Performance"

Abstract:

   Using a sample free of survivor bias, I demonstrate that common factors
in stock returns and investment expenses almost completely explain
persistence in equity mutual funds' mean and risk-adjusted returns.
Hendricks, Patel and Zeckhauser's (1993) "hot hands" result is mostly
driven by the one-year momentum effect of Jegadeesh and Titman (1993), but
individual funds do not earn higher returns from following the momemtum
strategy in stocks. The only significant persistence not explained is
concentrated in strong underperformance by the worst-return mutual funds.
The results do not support the existence of skilled or informed mutual fund
portfolio managers.

Additional quote from paper:

   The evidence of this article suggests three important rules-of-thumb for
wealth-maximizing mutual fund investors: (1) Avoid funds with persistently
poor performance; (2) funds with high returns last year have
higher-than-average expected returns next year, but not in years
thereafter; and (3), the investment costs of expense ratios, transaction
costs, and load fees all have a direct, negative impact on performance.
While the popular press will no doubt continue to glamorize the
best-performing mutual fund managers, the mundane explanations of strategy
and investment costs account for almost all of the important predictability
in mutual fund returns.

Rate This Message: http://www.cryonet.org/cgi-bin/rate.cgi?msg=9780