Hot Hands in Mutual Funds: Short‐Run Persistence of Relative Performance, 1974–1988

Abstract

The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk-adjusted performance between the top and bottom octile portfolios is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a different (previously used) data set and with some post-1988 data confirm the finding of persistence.ACADEMIC STUDIES SINCE THE 1960s find that mutual funds do not systematically outperform benchmark portfolios (such as the "market" indices)-see the classic papers by Treynor (1965), Sharpe (1966), and Jensen (1968, and recent updates with refinements by Grinblatt and Titman (1989b), Connor and Korajczyk (1991), and references therein. The practitioner literature sees matters differently, expressing a consistent belief that active selection among actively managed funds can be profitable. For instance, Rugg (1986) advocates, with some caveats, investing in aggressive-growth equity funds that are top-ranking performers in the most recent phase (one to six months) of a bull market. Similarly, Consumer Guide (1988, p. 14) reports, "Loads, fees, and expenses can be considerable, but most financial professionals suggest that the performance of the fund, not the costs, should be the primary consideration when choosing a fund."Mutual fund performance rankings are compiled on a regular and timely basis and are widely followed. Mutual funds that do relatively well tout their performance prominently in their advertising. Those that do not, search for

Short term persistence in mutual fund market timing and stock selection abilities

“…Thus, we repeat our persistence tests for 1-year periods and class-A shares exclusively and find that a winner-picking strategy yields an abnormal return of about 1.7% annually. This is in agreement with the results in Hendricks et al (1993). Overall, we think that these results lend support to Gruber's clientele hypothesis presented in Gruber (1996).…”

Micro-Economic Determinants of NAV of Islamic Equity Unit Trust Funds in Malaysia: An ARDL-Bounds Tasting Approach

“…Thus, funds that record positive persistence in the past will have a higher chance of attracting huge net inflows, which, in turn, lead to increase the fund unit price. This finding is in line with the results of the study by Hendricks et al (1993) who found stronger evidence that funds that do well in the past do well in the short-term future. Further, this is supported by Goetzmann and Ibbotson (1994), who suggested that past mutual fund returns could predict future returns.…”

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“…Hendricks et al (1993) and Goetzmann and Ibbotson (1994), among others, document persistent performance in mutual funds from one period to another. Although Carhart (1997) shows that a strategy that buys the top decile of mutual funds based on their last year's performance and shorts the bottom decile of mutual funds yields an 8% return, momentum in stocks as documented by Titman (1993, 2001) help explain part of this abnormal return along with other common risk factors in stock returns.…”