Article

Performance Persistence of Experienced Mutual Fund Managers

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Abstract

This study examines the performance of 93 fund managers over the 10 year period 1986 through 1995 using relative percentile ranks based on quarterly compounded, annual total returns measured against funds with the same investment objective. On average, managers with 10-year track records at the same fund do not perform better than managers with shorter track records. Also, for these experienced managers, superior performance in one five-year period is not predictive of superior performance over the next five years. However, inferior performance persists particularly for funds with above average expense ratios.

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... This significant positive relationship between fund manager performance in the two market periods can be interpreted as meaning that the managers performed fairly consistently in both rising and falling markets. These results support the earlier findings of Grinblatt and Titman (1992) and Porter and Trifts (1998), who concluded that fund managers performed consistently over a five-year period. ...
... This result can be interpreted as indicating that fund managers performed consistently in rising and descending markets. These results support earlier findings by Grinblatt and Titman (1992) and Porter and Trifts (1998), whereby fund managers performed consistently over a fiveyear period. .108 ...
Thesis
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Personality has for a long time been viewed as an important aspect of job performance. Two different types of personality variables have been detected: conscious, explicit traits and more unconscious, implicit motives. The relationship between personality and fund manager performance has mainly been studied within the field of behavioral finance. However, the scientific findings concerning the association of personality features with fund manager performance are rather fragmented. One reason for this apparent fragmentation is that research has concentrated on measurements of the mainly explicit traits and has neglected to measure implicit motives. In the present study, the theoretical and methodological approach is quite different. Personality measurements covering both implicit motives and explicit traits are studied in relation to objective data on fund managers’ five-year risk-adjusted performance (Sharpe). The five-year performance measurement period (2000-2005) of forty Finnish professional fund managers included a 31-month-long declining bear market and a 29-month-long rising bull market. This study had three major goals: first, to study the utility and validity of three personality tests—the Zulliger, Wartegg and Personality Research Form (PRF)—in relation to five-year performance (Study I); secondly, to construct a core personality indicator and investigate how the personality indicator predicts five- year performance (Study II); and thirdly, to investigate if the indicator’s three personality characteristics, financial risk attitude, stress tolerance and complex problem- solving, loaded differently on the bull and bear markets (Study III). The findings of Study I showed that the Zulliger Test had the strongest associative connection with fund performance, the PRF had the second strongest associative connection, and third came the Wartegg Test. In Study II, the three personality characteristics, financial risk attitude, stress tolerance and complex problem-solving, explained 53.8% of investors’ five-year performance. The results of Study III showed that small differences are found in the prediction strength of personality characteristics between bull and bear markets. The conclusions of the study are, briefly, that implicit motives have been neglected in behavioral finance, and individual thinking and stress management should be encouraged in order to enhance performance. Contrary to previous evidence, it seems possible to define the personality profile of the successful professional fund manager. Keywords: personality measures, fund managing, fund performance, risk taking, stress, problem solving, test validity, Zulliger Z test, Wartegg, PRF
... Brown and Goetzmann (1995) examined US mutual funds for the period 1976-1988. Their findings were consistent with a later study by Porter and Trifts (1998) in which superior past performance was not indicative of future performance, but poor performance tended to persist. ...
... Therefore, past performance was found to be unreliable as the sole criterion in predicting future performance. This finding is again in line with evidence from the previous literature (Porter et al, 1998). ...
Article
It is expected that the returns and resistance of Islamic mutual funds will be different from conventional mutual funds as the former have limited choices for portfolio diversification. This article analyses the performance of conventional and Islamic unit trusts for the period February 1995 to July 2012 in the Malaysian market, one of the most developed Islamic mutual fund markets. The performance analysis is based on four parameters: (i) risk-adjusted returns of unit trusts; (ii) market timing abilities; (iii) selection performance; and (iv) persistence. The results of this study suggest that the returns of both conventional and Islamic unit trusts have outperformed the market throughout the sample period. The results for market timing and selectivity are mostly the same for both categories of funds. However, Islamic unit trusts seem to have better resistance to market downturn than conventional unit trusts. The results of this research can be used by investors to identify funds or create portfolios that are more suitable for a recessionary scenario and for fund managers to better manage their portfolio performance during times when markets are likely to fall. The findings in this article are highly relevant for policymakers, investors and fund managers to determine policy matters, deciding on investment and marketing strategy for Islamic mutual funds.
... The role of managers on fund performance is an increasing topic of study due to the fiduciary duty of funds to invest on behalf of and for the best interest of beneficiaries (Marekwica and Steininger 2014;Sandberg 2013). Prior works have mainly addressed managers' performance by including some managerial characteristics in fund-level analyses (Babalos et al. 2015;Korniotis and Kumar 2011;Porter and Trifts 1998;among others). However, few studies examine performance at manager level (Alda et al. 2017;Pojarliev and Levich 2010;and Wang and Cheng 2014, as far as we know). ...
... Golec (1996) finds positive relation between tenure and performance. Porter and Trifts (1998) and Kempf et al. (2014) indicate that experienced managers may achieve certain status, becoming complacent. Ding and Wermers (2012) find that managers with longer tenure outperform/underperform in larger/smaller funds. ...
Article
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Firms of collective investment industries, such as mutual and pension funds, are knowledge-intensive organizations that share managers between their multi-businesses to transfer the know-how of their employees and take advantage of the firm-specific human capital. This paper analyses the determinants and consequences of the simultaneous management (also called side-by-side or SBS management) of mutual and pension funds. In a sample of UK domestic equity mutual and pension funds, we find that managers are more likely to become SBS managers whether they belong to larger firms, have prior experience handling multiple funds, possess higher tenure, are female, and run smaller funds. Furthermore, SBS managers outperform their peers, showing the value of sharing human resources among diversified firms. Our results also show that holding similar portfolios between the funds of a manager may facilitate the multi-fund management. Top performers (SBS and non-SBS) present higher portfolio similarities than bottom performers, and higher fund similarities allow top managers to attract flows between their funds. However, top non-SBS managers erode performance due to higher portfolio similarities.
... Brown and Goetzmann (1995) examined US mutual funds for the period 1976-1988. Their findings were consistent with a later study by Porter and Trifts (1998) in which superior past performance was not indicative of future performance, but poor performance tended to persist. ...
... Therefore, past performance was found to be unreliable as the sole criterion in predicting future performance. This finding is again in line with evidence from the previous literature (Porter et al, 1998). ...
Chapter
Mutual funds have been a convenient way for investors to gain the benefit of a diversified portfolio. Mutual fund managers collect funds from a large number of small investors and create a portfolio of assets, and each investor owns a small part of this portfolio in proportion to his investments. The difference between mutual funds and unit trusts lies in their legal structure, but the end result for investors is similar (Investment Company Institute (ICI), 2009). The very obvious potential risk for unit trusts is the volatility of market activities, which will affect the value of a security, bonds or any other security (Lau, 2007). Islamic mutual funds are different from conventional mutual funds as they invest only in Shariah-compliant assets such as stocks and sukuks (Fikriyah et al, 2007; Elfakhani et al, 2005). Conventional unit trust funds managers do not solely invest in equity markets compared with Islamic unit trusts; rather the fund may also comprise all types of risk-free investment (Low and Ghazali, 2007).
... In addition to past returns and fund expenses, size and market risk also explain part of the persistence of fund performance (Detzel & Weigand, 1998;Nerasti & Lucinda, 2016;Porter & Trifts, 1998). Size, due to the availability of portfolio capital, and market risk, because it motivates trends in market movements to which funds respond according to the investment style of managers (Detzel & Weigand, 1998). ...
Article
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The Brazilian mutual fund industry, despite having a high increase in net worth, is concentrated around a few large administrators. Therefore, it is worth questioning the extent to which this level of concentration can affect the performance delivered to the shareholders, as greater concentration implies less competition. In this way, this research aimed to analyze the impact of market competition on the performance persistence of equity mutual funds in Brazil. Using a sample of free portfolio equity investment funds from 2010 to 2019, the main results point to the existence of performance persistence for Brazilian free portfolio equity funds. Furthermore, they pointed out a positive and statistically significant relationship between the level of competition and the performance of funds, as well as in the interaction between competition and performance persistence. Consequently, indicating that, funds with greater performance persistence tend to maintain this persistence even in the face of greater industry competition. Keyword : Performance, Competition, Investment Funds, Alpha Desempenho, Competição, Fundos de Investimentos, Alfa
... (Guercio, Reuter, & Tkac, 2010)Argued that investor heterogeneity in the demand for broker services could drive market segmentation and cause differences in before-fee returns; competition for investors who value broker services led broker-sold funds to invest more in costly-to-provide investor services and less in portfolio management. (Porter & Trifts, 1998) found that managerial tenure is not a factor in mutual fund performance, (Costa & Porter, 2003) show that neither performance nor performance-persistence differ between funds run by managers with lengthy tenure (ten years or more) and funds with less experienced management (less than ten years).Tenure could also proxy for effort, because junior managers might need to work harder to signal their type (Chevalier, & Glenn , 1999) ...
Article
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The purpose of this paper is to find out that does fund distributors experience in the field of mutual fund has a vital importance? And if so, how does the experience of distributors have any effect on the performance of mutual fund. The structured questionnaire has been administered to 1007 respondents. Experience being the categorical moderator is been study in this research. The moderating and mediating effect of experience is been studied in this paper specifically on Indian Mutual fund Industry. The results showed very interesting facts about the overall direct and mediating impact of factors and the moderating effect of experience.
... High turnover by active management of funds does not necessarily lead to improved risk-adjusted returns. This performance debate continues to this day (Walker & Hat®eld, 1996;Porter & Trifts, 1998). However, the majority of the research concludes that very few investors will be able to do better than the market by investing through actively managed funds. ...
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In this paper, we place firms in the Morningstar’s style box cells and test whether selecting firms from these cells allows investors to compile a portfolio consistent with their risk tolerance. We confirm that the risk of those cells is consistent with the risk expectations published by Morningstar. Firms assigned to the upper left cells are lower risk than those assigned to the lower right cells. When we test for risk-adjusted returns we do not find that investing in high risk cells results in greater returns. Our results suggest higher returns are possible by investing in lower risk value cells.
... In fact, the same research finds that better risk adjusted performance are produced by managers who are young (less than 46 years) but with more experience (greater than seven years). Nevertheless, experience does not ensure success since Porter and Trifts (1998) do not find experience as an advantageous factor because in their study a superior performance over a five-year period does not correctly predict the performance over the following five years. ...
Article
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Growth, both in terms of size and choice, in the mutual fund industry among emerging markets has been impressive. However, mutual fund research in emerging markets hardly exists. This paper intends to fill this gap. In particular, the paper surveys the relative importance of factors considered important in the selection of mutual funds by financial advisors in emerging markets. Our survey focuses on Malaysia where the mutual industry started in the 1950s but only gained importance in the 1980s with the establishment of a government initiated programme. The results of our survey point to three important factors which dominate the choice of mutual funds. These are consistent past performance, size of funds and costs of transaction. Factors which relate to fund managers and investment style are not considered to be relatively important. With the impending liberalization of the financial markets in the developing world, our findings would assist those international funds that are considering expanding their operations into these emerging markets.
... Findings from this analysis confirm those of Lemak and Satish (1996) and Golec (1996). The finding contradicts those of Porter and Trifts (1998) and Fortin, Michelson, and Jordan-Wagner (1999) who found no relationship between manager tenure and performance. However, this study cannot be used to disconfirm their findings because of the short time horizon used. ...
Article
This study examines management characteristics, including education and experience, as determinants of mutual fund performance. Managers with graduate degrees did not perform differently from managers without graduate degrees. However, graduates of top 20 MBA programs outperformed MBAs from business schools not on the top 50 Wall Street Journal list. Manager's tenure was positively related to performance.
... The longer they manage, the greater the opportunity for mean reversion-thus the inverse relationship between overall performance and tenure. Porter and Trifts (1998) also found evidence of mean reversion at play in the performance ranks of 93 "solo" managers over a 10-year period. Using style-adjusted rankings, they found that successful performance in the first five years is not predictive of success in the subsequent five years. ...
Article
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This study provides evidence that merit-specifically, performance relative to peers measured on a style- adjusted basis-plays a significant role in the length of a mutual fund manager's career. Managers who underperform their peers are more likely to lose their jobs. However, surviving managers of any tenure-even those who manage their funds for W or more years-generally do not outperform the market or their style benchmarks and do not display consistently superior performance.
... This research will address this issue of diversity of funds in more detail and would propose different forms of mutual funds in the present research setting that would give investors the opportunity to optimize their investments.Considerable attention has been given in the literature on the characteristics of the fund managers themselves that affect the performance of mutual funds they manage.Shukla and Inwegen (1995) relate it to their origin arguing that local fund managers with insight into local conditions are able to manage the funds better compared to international fund managers. On the other handAng et al. (1998) link it to three characteristics of fund managers which include risk taking abilities, insights into critical information and superior skills of evaluation.Golec (1996) andPorter and Trifts (1998), debate on whether experience of fund managers can determine their ability to manage their fund portfolios effectively. as causal factors therefore calls for greater empirical validation.Indro et al. (1998) link the performance of the mutual funds with investment style of fund managers. ...
... Golec (1996) finds that experience positively correlates with performance, but Chevalier and Ellison (1999b) find that the career concerns of younger managers elicit greater effort ITomthem since termination is more performance-sensitive for younger managers. Porter and Trifts (1998) suggest that experienced managers may become complacent, resulting in a negative impact on performance. Gottesman and Morey (in press) extend previous studies in this area and find that managers from schools with higher average GMAT scores and managers ITomMBA programs ranked in the top 30 by Business Weekexhibit better performancethan managers ITomother MBA programs. ...
Article
Classical decision-making theory suggests that decisions made by an individual or a team of decision makers should lead to the same performance outcome. Conversely, behavioral decision-making theory argues that decisions made by teams result in superior micro or macro forecasts and performance outcomes. Our tests using mutual funds support the classical decision-making theory. The empirical results are time invariant and robust with respect to the selected index or model specification.
... Porter, Trifts (1998Trifts ( ) 1986Trifts ( -1995 ...
... In this section we attempt to understand the influence of some variables as a source of differences in mutual fund efficiencies. In this regard, although the literature is remarkable (see, for instance Bär et al., 2011;Golec, 1996;Atkinson et al., 2003;Niessen and Ruenzi, 2007;Hambrick and Mason, 1984;Malhotra et al., 2007;Porter and Trifts, 1998;Wermers, 2003;Gottesman and Morey, 2006;Ippolito, 1989;Elton et al., 1993a, among others), we will make an attempt to synthesize it, splitting the analysis of determinants into three main sources of variation, or types of information that may influence fund performance, namely: (i) some fund characteristics; (ii) some fund management characteristics; and (iii) environmental factors such as the wealth of the region where investments take place. ...
Article
Islamic funds are increasingly seen as an alternative to conventional funds, in part due to the growing prominence of Islamic finance. In contrast to most previous literature, this paper focuses on the countries of the Middle East and North African region (MENA), and compares the performance of Islamic and conventional funds during crisis and recovery periods. Results show that the relative performance of Islamic and conventional funds seem to be conditioned by several factors such as the (geographical) context in which the investment is made. Considering the entire MENA region, Islamic funds perform, on average, slightly worse than conventional funds. However, if the analysis is restricted to Gulf Cooperation Council (GCC) countries, the result opposite is found. In addition, the performance gap between the two types of funds either widens or shrinks when considering recovery or crisis times, providing evidence that Islamic funds are more stable in times of distress.
... Grinblatt and Titman (1992), Goetzmann and Ibbotson (1994), Gruber (1996), Blake and Morey (2000), Carhart et al. (2002), Jan and Hung (2004), Bollen and Busse (2005), Ferruz et al. (2007), Kacperczyk et al. (2008), Cremers and Petajisto (2009) and Vidal-García, (2013), found evidence of performance persistence. On the other hand, Jensen (1968), Kahn and Rudd (1995), Carhart (1997), Porter and Trifts (1998), Fletcher (1999), Jain and Wu (2000), Philpot et al. (2000), Hallahan and Faff (2001), Fletcer and Forbes (2002), Prather et al. (2004), Bilson et al. (2005), Christensen (2005) and Morey (2005) found only slight or no evidence of performance persistence. In Greek scholar, there have been conducted a few studies (eg. ...
Chapter
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In this paper, an artificial neural network (ANN) and a genetic programming (GP) approach are both applied in order to predict Greek equity mutual funds’ performance and net asset value. The back propagation algorithm is used to train the weights of ANNs while jGPModeling environment is used to implement the GP approach. The prediction of both the performance and net asset value of mutual funds is accomplished through historical economic information and fund-specific historical operating characteristics. Our study is the first one to compare the forecasting results of the ANN approach with the results obtained through GP approach on mutual fund performance prediction. The main conclusion of our work is that ANN’s results outperforms the GP’s results in the prediction of mutual funds’ net asset value, while GP’s result’s outperforms ANN’s results in the prediction of mutual funds’ return. Overall, our experimental results showed that both ANNs and GP comprise useful and effective tools for the development of mutual fund prediction models.
... Finally, a study by Porter and Trifts (1998) on the performance of specific fund managers suggested that superior past performance was not indicative of future performance, but that poor performance tends to persist. This brief review of US studies reflects the wide range of findings on the question of persistence of performance of unit trusts. ...
Article
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This study examines persistence of performance in South African general equity and fixed income unit trusts over the period January 1989 to December 1999. The formation and holding periods studied ranged from one quarter to two-years. Significant persistence was found for most combinations of formation and holding periods for risk-adjusted equity unit trusts. It is suggested that choosing equity unit trust winners from the previous two-years and holding them for the next two-years may be the best long-term strategy to adopt. The fixed income unit trusts showed far less significant persistence than the equity unit trusts with loser-loser persistence predominating.
... This result can be interpreted as indicating that fund managers performed consistently in rising and descending markets. These results support earlier findings by Grinblatt and Titman (1992) and Porter and Trifts (1998), whereby fund managers performed consistently over a fiveyear period. ...
Article
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This study investigates how the personality factors of financial risk attitude, stress tolerance and complex problem solving predict investment performance in relation to rising versus descending market periods. The performance of 40 professional fund managers was measured over a total period of five years. In the rising market the three personality factors predicted 39% of the performance. In the descending market period the risk attitude and stress tolerance factors predicted 46.4% of the performance. The conclusions of the present study are as follows: a) Small differences were found in prediction strength between the personality factors of rising and descending markets. b) The financial risk attitude was the most important factor in both bull and bear markets. c) Stress tolerance is important in both periods, but especially in descending markets. d) Motivation for complex problem solving is important in rising markets. e) The three personality factors seem to be robust predictors of fund manager performance in all market phases.
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This paper examines the ability of well known mutual fund characteristics, including the expense ratio, turnover, fund size, recent past performance, manager tenure, and Morningstar mutual fund star ratings, to predict emerging market mutual fund performance. We form three separate samples of emerging market mutual funds, adjust the returns for loads, and employ three methods to adjust for survivorship bias. We find that the expense ratio is the only fund characteristic that consistently predicts future fund performance. Specifically, emerging market funds with lower expense ratios predict better future fund performance. We also find some limited evidence that passive management outperforms active management in emerging market funds.
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The purpose of this study is to test whether a mutual fund managers' characteristics helps to explain fund performance, risk, and fees. The statistical tests consider performance, risk, and fees simultaneously to avoid biased results produced by earlier studies that ignore simultaneity. Results show that a fund's performance, risk, and fees are significantly impacted by its manager's characteristics. All else equal, investors can expect better risk-adjusted performance from younger managers with MBA degrees who have longer tenure at their funds. Also, funds with low fees and more diversified portfolios perform better. The most significant predictor of performance is the length of time a manager has managed his or her fund (tenure). Funds that keep administrative expenses low also perform relatively well but large management fees do not necessarily imply poorer performance. Apparently, a large management fee signals superior investment skill which leads to better performance.
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Using a sample free of survivor bias, the author demonstrates that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Darryll Hendricks, Jayendu Patel, and Richard Zeckhauser's (1993) 'hot hands' result is mostly driven by the one-year momentum effect of Narasimham Jegadeesh and Sheridan Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers. Copyright 1997 by American Finance Association.
Article
Mutual funds represent one of the fastest growing type of financial intermediary in the American economy. The question remains as to why mutual funds and in particular actively managed mutual funds have grown so fast, when their performance on average has been inferior to that of index funds. One possible explanation of why investors buy actively managed open end funds lies in the fact that they are bought and sold at net asset value, and thus management ability may not be priced. If management ability exists and it is not included in the price of open end funds, then performance should be predictable. If performance is predictable and at least some investors are aware of this, then cash flows into and out of funds should be predictable by the very same metrics that predict performance. Finally, if predictors exist and at least some investors act on these predictors in investing in mutual funds, the return on new cash flows should be better than the average return for all investors in these funds. This article presents empirical evidence on all of these issues and shows that investors in actively managed mutual funds may have been more rational than we have assumed.
Article
This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. The authors find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Copyright 1992 by American Finance Association.
0001) (0.0002) (0.5954) Inferior Performance/ 42
  • High Expense
High Expense, n --19 (0.0001) (0.0002) (0.5954) Inferior Performance/ 42.3 51.6