On the robustness of persistence in mutual fund performance

• Published in: The North American journal of economics and finance 2016-04, Vol.36, p.192-231
• Main Authors: Matallín-Sáez, Juan Carlos, Soler-Domínguez, Amparo, Tortosa-Ausina, Emili
• Format: Article
• Language: English
• Subjects: Mutual fund; Mutual funds; Persistence; Portfolio investments; Portfolio performance; Robustness; Studies
• ISSN: 1062-9408; 1879-0860
• DOI: 10.1016/j.najef.2016.01.002

•We analyze persistence in US equity mutual fund performance over 1990–2015.•We initially measure persistence based on contingency tables and transition matrices.•We propose, alternatively, a recursive portfolio approach based on past performance.•Distinguishing among style groups and using our approach is relevant.•The evidence of persistence is conditioned by the sample period considered. This paper analyzes persistence in US equity mutual fund performance over the period 1990–2015. We apply commonly used measures of persistence, which we test using a set of simulated passive funds. In the first stage we apply contingency tables and transition matrices in accordance with previous literature. Results show how these methodologies are biased towards finding evidence of persistence too easily. In the second stage, we take a recursive portfolio approach, which assesses the performance of investing by following recommendations based on past performance. Results show the importance of both estimating persistence by distinguishing among fund style groups, and considering the cross-sectional significance of recursive portfolios. In general, our results support evidence of persistence in mutual fund performance, especially for the case of the best mutual funds. However, this evidence does not hold for the most recent subperiod, 2008–2015. Empirical evidence of persistence is conditioned by the sample period, a result that could explain the inconclusive results found in the literature.