Induced persistence or reversals in fund performance?: the effect of survivorship bias

Abstract

There are two competing views regarding the potential effect of survivorship bias on the assessed persistence in performance of managed fund returns. On the one hand Brown et al. (Review of Financial Studies, 5, 1992) argue that spurious persistence will be induced, while alternatively Grinblatt and Titman (Journal of Finance, 47, 1992) argue the converse case, namely, that performance reversals or nonpersistence is more likely. The current study applies the non parametric contingency table methodology to the year on year raw returns of a sample of Australian Rollover funds as a means of gauging which of these survivorship bias hypotheses has greater support. Generally, the results show that although there is some evidence of persistence, the dominant pattern is one of reversals in performance, thus supporting the Grinblatt and Titman view.