The Harm in Selecting Funds that Have Recently Outperformed

12 Pages Posted: 13 Feb 2016 Last revised: 28 Feb 2016

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

California State University, Fullerton - Department of Finance

Date Written: February 25, 2016

Abstract

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.

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

JEL Classification: G23, G11

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: https://ssrn.com/abstract=2732060 or http://dx.doi.org/10.2139/ssrn.2732060

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)

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

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