15th Annual Meeting of the German Finance Association (DGF)


Abstract

Are Mutual Funds Doomed to Underperform? Evidence from Managerial Turnover and Fund Flows

Bessler, Wolfgang; Lückoff, Peter; Blake, David; Tonks, Ian

We investigate the impact of managerial turnover and fund flows on performance persistence of U.S. equity mutual funds. Both, the replacement of a bad performing fund manager by the fund company and the withdrawal of money by investors can be seen as control mechanisms in delegated money management for underperforming funds. On the other end of the perform-ance spectrum, poaching of outperforming fund managers by competing fund companies or high fund inflows from investors into outperforming funds might pose a threat on the sustain-ability of good performance results. Using a sample of 9,316 U.S. equity mutual funds from 1992 to 2004 and ranked portfolio tests as well as survival tests our results confirm this rela-tionship for the impact of managerial turnover on performance. Top funds without manager change show stronger persistence than top funds experiencing a change in management. The replacement of bottom fund managers improves the subsequent performance of the fund. The results for the impact of flows on performance support our hypothesis that winner funds suffer from large inflows. Loser funds, in contrast, do not seem to profit from outflows to the same degree. However, neither flows nor managerial turnover can explain the lack of persistence among top funds documented in the literature. Our results are robust to a variety of alternative ranking procedures.
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