Persistence of mutual fund operating characteristics: returns, turnover rates, and expense ratios

Abstract

This study tests persistence of mutual fund returns, turnover rates, and expense ratios over the 20-year period from 1971 to 1990. Multivariate models also are developed to examine synergies among persistence of returns, expense ratios and turnover rates. Potential long-run economies of scale are analysed by determining whether or not there is a significant relationship between asset size and these other operating characteristics. Tests are developed to contrast the decade of the 1970s with the decade of the 1980s and to examine persistence between consecutive years. The results indicate that there was no long-term persistence of returns, expenses, or turnover rates for 151 equity mutual funds that operated over the full two decades from 1971 to 1990. Tests of short-term performance persistence show strong persistence of good performance for periods of one, two and three years. For a four-year time period, there is no significant persistence of returns. The tests for consecutive years in contrast to tests between decades show that there is short-term, but not long-term persistence for returns.

Australian retail fund performance persistence

“…Yet, performance persistence seems to be at odds with generally accepted perceptions of market efficiency. While studies by Hendricks et al (1993), Goetzmann and Ibbotson (1994), Gruber (1996) and Droms and Walker (2001) find support for short-term performance persistence over 1-3 years, other studies such as Grinblatt and Titman (1992) and Malkiel (1995) suggest that past performance predicts future performance over longer periods of up to 5 years. The alternative view is that fund performance is not persistent.…”

The performance of diversified emerging market equity funds

“…Malkiel (1995) finds considerable persistence in funds during the 1970s but not in the 1980s. Lastly, Droms and Walker (2001) test for long term and short term persistence over two decades. They find evidence of short term but not long term persistence.…”

Decomposition of mutual fund underperformance

“…Fund characteristics measure the demand of a fund or fund category as reflected in the fund's adaptive ability. Manager attributes indicate the effect of manager experience and background (Golec, 1996;Cahart, 1997;Chevalier and Ellison, 1999;Droms and Walker, 2001;Annaert et al, 2003;Prather et al, 2004). Luck attempts to capture the measurement error or sampling bias (Kothari and Warner, 2001).…”