| Research on mutual funds has produced several stylized facts. Actively managed funds do not outperform passively managed diversified portfolios. It has proven difficult to identify, ex ante, funds that would outperform broad market indicators after adjusting for risk. Fund investors continue to chase past returns as predictors of future performance. Winners are compensated handsomely in terms of net fund flows; the losers are not penalized much, except for the extreme worst performers.; The persistence literature documented that prior performance can predict future performance. An especially strong finding of this literature is that poor performance persists to a much larger degree than superior performance. Persistence of superior performance can be explained entirely once stock market momentum is taken into account. However, even when the stock market momentum is taken into account, persistence of poor performance is left unexplained.; We address two important shortcomings in the literature. The first is the possibility that the documented persistence could be due to calendar-related distortions of fund returns instead of skill differentials. The second is that the persistence literature did not formally test Carhart's passive momentum conjecture. We also explore the possibility that Carhart's popular 4-factor model of performance attribution may not be adequate in explaining the returns of prior performance-ranked portfolios of mutual fund.; Using performance attribution models employed in the existing literature, we document that once the calendar year-end noise is masked, measures of persistence are strikingly smaller, regardless of the period studied. We further show that the variation in persistence results induced by varying the timing of portfolio formation is robust to weighting schemes, survival requirements, fund size, and sample periods. We also find that there is very little persistence in performance of "robot" funds that are formed by randomly selecting stocks. We also find that using a longer-term momentum factor results in a much better performance attribution model compared to using Carhart's short-term momentum factor. Once the longer-term momentum factor replaces the short-term momentum factor, persistence in fund performance disappear even when the portfolios are formed at the end of the calendar years.; Keywords. Persistence, Calendar-Related Distortions, Robot Funds, Performance Attribution Models, Momentum Factors... |
