Persistence in Mutual Fund Performance: 2.0

Abstract

We address two important shortcomings in the persistence literature. The first is the possibility that the documented persistence could be due to calendar-related distortions of fund returns instead of skill differentials. 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 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.