Performance Persistence

Authors

  • STEPHEN J. BROWN,

  • WILLIAM N. GOETZMANN

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    • Brown is from the Leonard Stern School of Business, New York University. Goetzmann is from the School of Management, Yale University. We thank Bent Christiansen, Edwin Elton, Mark Grinblatt, Martin Gruber, Gur Huberman, Roger Ibbotson, Philippe Jorion, Robert Korajczyk, Josef Lakonishok, Jayendu Patel, Nadav Peles, Stephen Ross, William Schwert, Erik Sirri, an anonymous referee, and editor René Stulz for helpful comments. We thank participants in the following conferences and workshops for their input: the 1993 Western Finance Association Meetings, the October 1993 NBER program on asset pricing, the 1994 AFA session on the behavior of institutional investors, and finance workshops at Columbia Business School, The University of Texas, the University of Illinois at Champagne, and the Yale School of Management. We also thank Nadav Peles for programming assistance and Stephen Livingston for data collection. We thank Ibbotson Associates and Morningstar, Inc., for providing data used in the analysis. All errors are the sole responsibility of the authors. Roger Ibbotson contributed substantially to the preliminary version of this article. This article was formerly circulated as “Attrition and Mutual Fund Performance.”


ABSTRACT

We explore performance persistence in mutual funds using absolute and relative benchmarks. Our sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A probit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed, and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures.

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