The Harm in Selecting Funds that Have Recently Outperformed

Bradford Cornell

California Institute of Technology

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

David Nanigian

The American College; Pennsylvania State University

February 25, 2016

We empirically investigate the investment results of commonly used fund selection strategies that involve redeploying assets from underperforming to outperforming funds. Based on portfolios constructed using U.S. mutual fund data over typical three-year evaluation periods, we find that investors who chose funds with poor recent performance earned higher excess returns than those who chose funds with superior recent performance. Our findings pose a challenge for asset owners: If past performance is used at all in selecting funds, it is the best-performing funds that should be replaced. Realistically, however, a policy of replacing successful funds with poor performers is unlikely to gain widespread acceptance. Instead, the practical implication of our paper is that asset owners should focus on factors other than past performance. We offer alternate criteria for selecting funds.

Number of Pages in PDF File: 12

Keywords: Asset Management, Investment Consultants, Fund Performance, Mutual Fund Selection

JEL Classification: G23, G11

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Date posted: February 13, 2016 ; Last revised: February 28, 2016

Suggested Citation

Cornell, Bradford and Hsu, Jason C. and Nanigian, David, The Harm in Selecting Funds that Have Recently Outperformed (February 25, 2016). Available at SSRN: http://ssrn.com/abstract=2732060 or http://dx.doi.org/10.2139/ssrn.2732060

Contact Information

Bradford Cornell
California Institute of Technology ( email )
Pasadena, CA 91125
United States
310-825-2922 (Phone)
310-206-5455 (Fax)
Jason C. Hsu
Rayliant Global Advisors ( email )
Hong Kong
Research Affiliates, LLC ( email )
620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
HOME PAGE: http://www.jasonhsu.org
University of California, Los Angeles - Anderson School of Business
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
David Nanigian (Contact Author)
The American College ( email )
270 South Bryn Mawr Avenue
Bryn Mawr, PA 19010
United States
610-526-1324 (Phone)
610-516-1359 (Fax)
HOME PAGE: http://www.theamericancollege.edu/why-us/faculty/david-nanigian-ph.d
Pennsylvania State University ( email )
University Park
State College, PA 16802
United States
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