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Fund Flows, Manager Changes, and Performance Persistence
[Does motivation matter when assessing trade performance? An analysis of mutual funds]

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  • Wolfgang Bessler
  • David Blake
  • Peter Lückoff
  • Ian Tonks

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 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.

Suggested Citation

  • Wolfgang Bessler & David Blake & Peter Lückoff & Ian Tonks, 2018. "Fund Flows, Manager Changes, and Performance Persistence [Does motivation matter when assessing trade performance? An analysis of mutual funds]," Review of Finance, European Finance Association, vol. 22(5), pages 1911-1947.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:5:p:1911-1947.
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    1. Keith Cuthbertson & Dirk Nitzsche & Niall O’Sullivan, 2023. "UK mutual funds: performance persistence and portfolio size," Journal of Asset Management, Palgrave Macmillan, vol. 24(4), pages 284-298, July.

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