Return Persistence and Fund Flows in the Worst Performing Mutual Funds
27 Pages Posted: 18 Apr 2007 Last revised: 22 Aug 2010
Date Written: April 2007
We document that the observed persistence amongst the worst performing actively managed mutual funds is attributable to funds that have performed poorly both in the current and prior year. We demonstrate that this persistence results from an unwillingness of investors in these funds to respond to bad performance by withdrawing their capital. In contrast, funds that only performed poorly in the current year have a significantly larger (out)flow of funds/return sensitivity and consequently show no evidence of persistence in their returns.
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