Title: Why is Persistent Mutual Fund Performance so Difficult to Achieve? The Impact of Management Turnover and Fund Flows
Abstract: The objective of this research is to investigate the impact that fund flows and management turnover have on the investment performance of actively managed equity mutual funds over time. Both fund flows and manager turnover have been identified in the literature as relevant factors that can significantly affect performance persistence. We analyze which of these factors has a stronger impact and how they interact. Using a sample of 3,948 U.S. equity mutual funds for the period from 1992 to 2007, our results support the notion that both mechanisms impact performance predictability over both the cross-section and time. The future performance of top past performing funds strongly suffers from both the departure of skilled fund managers and even more from excessive inflows. The future performance of past loser funds benefits from a replacement of their unskilled or unlucky managers but does not benefit from cash outflows to the same degree. Furthermore, we provide empirical evidence that both factors have a marginal and mutually independent impact on performance and document a strong interaction between both variables. For loser funds the combined effect on performance is equal to management fees. For winner funds it amounts to 60 percent of total fees. Including information about changes in fund management and fund flows into the mutual fund investment decision process would have yielded highly significant four-factor alphas of 3.12 to 4.44 percent per year before fees.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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Cited By Count: 2
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