The information content of portfolio performance history and persistence in fund performance: An examination of rollover funds

Abstract

This paper examines the relation between past and future performance and explores the optimal past performance information set for a subset of Australian investment funds, namely, rollover funds. Four categories of funds are examined: fixed interest; multi‐sector yield; multi‐sector balanced; and multi‐sector growth. This study extends the performance persistence literature through the use of three methodologies (1) regression analysis;(2) non‐parametric contingency tables; and (3) top (and bottom) quartile rankings to explore the information content of fund performance history for groups of funds differentiated by investment objective. The results of the regression analysis suggest that there is evidence in support of persistence in performance for the fixed interest funds (particularly when performance is measured in terms of Jensen Alpha) but much more ambiguous evidence in relation to the multi‐sector funds. Contingency table analysis of fund performance histories of varying lengths reveals quite different results depending upon whether raw or risk‐adjusted returns are used. Use of raw returns creates an overall impression of performance reversals, whereas use of risk‐adjusted returns suggests the existence of performance persistence. Finally, the use of prior period top‐quartile and bottom‐quartile ranking are found to show strong evidence of persistence in respect to the risk‐adjusted performance of fixed‐interest funds.