Measuring Mutual Fund Performance Persistence and Its Correlates

Summary

This report summary studies whether mutual funds that performed relatively well continue to do so, and whether weak performers remain weak. It defines persistence through the serial relationship in a fund’s Sharpe ratios: each month, it calculates Sharpe ratios from the preceding two years of returns, then runs a first-order autoregression on the most recent twelve monthly readings. The estimated coefficient is used as the persistence measure. In the reported fund sample, the coefficient’s mean is 0.505 and its median is 0.495; the summary also says persistence has declined in recent years.

The reported associations link persistence positively with returns, Sharpe ratio, and portfolio exposure, and negatively with volatility and maximum drawdown. Fund size and several manager attributes, including education and experience, are described as having no significant relationship. The summary reports stronger persistence for female managers and weaker persistence when managers change frequently, while noting a decline when there are three managers. These are findings from the summarized study, not proof of causation or a guarantee that past fund performance predicts future returns. It flags factor changes and model misspecification as risks.

Key ideas

• The study measures persistence by autoregressing a rolling series of monthly fund Sharpe ratios.
• The reported average persistence is modest and is said to have declined in recent years.
• Returns, Sharpe ratio, and portfolio exposure are positively associated with persistence in the summary.
• Volatility, maximum drawdown, and frequent manager changes are associated with weaker persistence.
• The reported relationships are sample findings and may be affected by changing factors or model misspecification.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.