Working Paper: NBER ID: w13042
Authors: Jonathan B. Berk; Ian Tonks
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G11; G12; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investors' reluctance to withdraw capital (F21) | persistence in returns of the worst performing mutual funds (G23) |
| attenuated response of investors (G40) | persistence in returns of seasoned funds (G23) |
| seasoned funds (G23) | lower flow of funds-performance sensitivity (E50) |
| unseasoned funds (G23) | higher flow of funds-performance sensitivity (E50) |
| previous performance (D29) | future fund flows (G23) |
| funds with persistent poor performance (G23) | lower sensitivity in subsequent fund flows (G41) |
| funds that performed poorly only in the current year (G23) | no significant persistence in returns (G14) |