Mutual Fund Performance

86 Pages Posted: 19 Jan 2007

See all articles by Dirk Nitzsche

Dirk Nitzsche

City University London - The Business School

Keith Cuthbertson

Niall O'Sullivan

University College Cork

Date Written: 2006


We evaluate the academic research on mutual fund performance in the US and UK concentrating particularly on the literature published over the last 20 years where innovation and data advances have been most marked. The evidence suggests that ex-post, there are around 2-5% of top performing UK and US equity mutual funds which genuinely outperform their benchmarks whereas around 20-40% of funds have genuinely poor. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence on picking winners suggests past winner funds persist, particularly when rebalancing is frequent (i.e., less than one year) - but transactions costs and fund fees imply that economic gains to investors from actively switching into winner funds may be marginal. However, recent research using more sophisticated sorting rules (e.g., Bayesian approaches) indicate possible large gains from picking winners, when rebalancing monthly. The evidence also clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity mutual funds but hedge funds show better ex-post and ex-ante risk adjusted performance than do mutual funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past "active" loser funds. Only very sophisticated investors should pursue an active investment strategy of trying to pick winners - and then with much caution.

Keywords: Mutual fund performance, persistence, smart money

JEL Classification: C15, G11, C14

Suggested Citation

Nitzsche, Dirk and Cuthbertson, Keith and O'Sullivan, Niall, Mutual Fund Performance (2006). Available at SSRN: or

Dirk Nitzsche

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Niall O'Sullivan

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a

No contact information is available for Keith Cuthbertson

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