Persistence in Mutual Fund returns: an examination of U.S. Growth Mutual Funds from 1988 - 1996
Dutta, A; Su, R
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There have been a number of studies examining whether mutual fund performance persists. Researchers using various models of regression analysis report conflicting findings. This study proposes a simpler approach - a direct annual examination of whether a fund beat the market proxy or not. As per prior research, the S&P 500 is chosen to represent the market. The sample consists of 943 mutual funds over the nine-year study period, with a low of 186 funds in 1988 to a high of 636 funds in 1996. A look at one-year persistence shows both outperformance and underperformance from 1989 to 1996. It is seen that the percentage repeat winners exceeds repeat losers in 6 out of 8 years, the exceptions being 1990 and 1996. This result supports the earlier findings of a "hot hands" phenomenon reported by Hendricks, Patel and Zeckhauser (1993) and Goetzmann and Ibbotson (1994). The two years when losers are greater in repeat percentage, 1990 and 1996, are preceded by years in which the market benchmark had very high returns. The implication is two-fold: losers in really good years, on average, are far more likely to repeat their performance, and winners in really good years are less likely to repeat their performance. While survivorship bias is acknowledged, an examination of the 186 funds that have returns for the entire study period shows that 4 funds achieved a nine-year winning streak. The winning performance is still evident after adjusting for risk. The percentage of funds that have a perfect winning record are far higher than would be expected assuming that mutual fund performance is a random occurrence.