Mutual Fund Ratings and Performance Persistence

27 Pages Posted: 28 Jan 2011

See all articles by Pierre Hereil

Pierre Hereil

affiliation not provided to SSRN

Philippe Mitaine

affiliation not provided to SSRN

Nicolas Moussavi

Lyxor Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: June 25, 2010

Abstract

This paper studies the persistence of mutual fund performance. Academic research often focuses on fund returns, sometimes adjusted for style and market cap biases. Because fund rating systems play a central role in the asset management industry, we consider another approach in this paper. Using a Markov modeling of these ratings, we illustrate that the persistence of the performance is relatively poor with respect to the time horizon of investors. We show that two facts may explain these results. First, the rating system is not necessarily time-homogeneous. Second, the importance of style is crucial when comparing the ratings of mutual funds. However, we show that it is extremely difficult to characterize quantitatively the style of a mutual fund. We conclude that fund selection is more art than science, and that quantitative analysis must be combined with qualitative insight.

Keywords: Mutual funds, rating system, style analysis, Markov chain, active management

JEL Classification: G11, G24, C53

Suggested Citation

Hereil, Pierre and Mitaine, Philippe and Moussavi, Nicolas and Roncalli, Thierry, Mutual Fund Ratings and Performance Persistence (June 25, 2010). Available at SSRN: https://ssrn.com/abstract=1749414 or http://dx.doi.org/10.2139/ssrn.1749414

Pierre Hereil

affiliation not provided to SSRN ( email )

Philippe Mitaine

affiliation not provided to SSRN ( email )

Nicolas Moussavi

Lyxor Asset Management ( email )

Paris
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

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