Why Does Mutual Fund Performance Not Persist? The Impact and Interaction of Fund Flows and Manager Changes

44 Pages Posted: 22 Oct 2010  

Wolfgang Bessler

Justus-Liebig-University Giessen

David P. Blake

City University London - Cass Business School - The Pensions Institute

Peter Lueckoff

Justus-Liebig-University Giessen

Ian Tonks

University of Bath School of Management

Date Written: March 12, 2010

Abstract

This paper investigates the reasons for the lack of long-term persistence in the investment performance of actively managed equity mutual funds. We document that the responses of investors, fund managers, and investment management companies to past performance affect future performance. Conditioning on fund flows and manager changes allows us to predict future performance of both past outperforming (winner) and past underperforming (loser) funds. Recent winner funds, experiencing neither high inflows nor a manager change, outperform by 3.60 percentage points based on risk-adjusted returns in the following year, relative to winner funds suffering from both effects. The performance of the worst performing funds experiencing both the replacement of the fund manager (internal governance) and high outflows (external governance) enjoys a subsequent increase of 2.40 percentage points in the following year, relative to loser funds not experiencing these effects. Among loser funds, in particular, both mechanisms appear to interact strongly.

Keywords: Mutual Funds, Performance Persistence, Fund Flows, Manager Turnover

JEL Classification: G28, G29, G32

Suggested Citation

Bessler, Wolfgang and Blake, David P. and Lueckoff, Peter and Tonks, Ian, Why Does Mutual Fund Performance Not Persist? The Impact and Interaction of Fund Flows and Manager Changes (March 12, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1695890 or http://dx.doi.org/10.2139/ssrn.1695890

Wolfgang Bessler (Contact Author)

Justus-Liebig-University Giessen ( email )

Center for Finance and Banking
Licher Strasse 74
Giessen, D-35394
Germany
49-641-9922460 (Phone)
49-641-9922469 (Fax)

HOME PAGE: http://wiwi.uni-giessen.de/home/Bessler/

David P. Blake

City University London - Cass Business School - The Pensions Institute ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Peter Lueckoff

Justus-Liebig-University Giessen ( email )

Center for Finance and Banking
Licher Strasse 74
Giessen, 35394
Germany
+49 641 9922464 (Phone)
+49 641 9922469 (Fax)

HOME PAGE: http://wiwi.uni-giessen.de/home/bessler

Ian Tonks

University of Bath School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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