This study uses daily mutual fund return data and standard performance evaluation models to examine persistence in mutual fund performance and finds that positive performance among funds does persist but is a short lived phenomenon. Performance persistence refers to the concept that a manager who has performed well (poorly) during a specific time interval is likely to continue to perform well (poorly) over the subsequent time interval. If manager performance tends to persist, then investors can use a manager’s past results to predict the manager’s future performance and invest in funds accordingly. Financial researchers have studied performance persistence extensively, and in general, results have been inconclusive. What makes this study different than previous work is the frequency of the mutual fund return data. Unlike the previous studies which rely on monthly return data, the authors use daily return data. This provides the authors with significantly more observations which allow them to examine persistence on a quarterly rather than an annual basis.

            The authors measure fund performance as the fund’s abnormal return or alpha – the return earned by the manager relative to the return expected to be earned given the risk level chosen by the manager. In this specific study, the authors examine 230 mutual funds over the 1985 to 1995 period. Unpublished studies find similar results for more recent fund samples using the same methodology. Each quarter, using the Carhart model, the authors estimate the abnormal return for all of the funds in the sample. Next, for each quarter, they rank funds based on their abnormal returns and form deciles with the top decile representing funds with the highest abnormal return during the quarter. Then, they calculate the abnormal return generated by each decile of funds over the following quarter.

            For fund investors, the most important result of the study is that the authors find evidence of persistence but the persistence is short lived. The top decile of funds earn significant abnormal returns during the subsequent quarter ranging from 25 to 39 basis points depending on the model used to measure performance. This positive abnormal return disappears when examining fund performance over semiannual or annual periods. Persistence of poor performance also exists and is also a short lived phenomenon as funds in the bottom decile generate abnormal returns of -0.77% over the subsequent quarter. To ensure the validity of the results, the authors measure performance assuming managers are following various types of investment strategies (stock selection, market timing, or a combination of the two), and they find that the results hold across all situations.

            Overall, the authors demonstrate that fund performance persists over quarterly intervals and that investors can use past quarterly performance as a helpful guide in determining which mutual funds to buy or avoid.