Return Persistence and Fund Flows in the Worst Performing Mutual Funds
We document that the observed persistence amongst the worst performing actively managed mutual funds is attributable to funds that have performed poorly both in the current and prior year. We demonstrate that this persistence results from an unwillingness of investors in these funds to respond to bad performance by withdrawing their capital. In contrast, funds that only performed poorly in the current year have a significantly larger (out)flow of funds/return sensitivity and consequently show no evidence of persistence in their returns.
Berk is grateful for financial support from the National Science Foundation (Grant No. 23-3371-00-0-79-092). Part of this work was completed while Tonks was a visiting Houblon-Norman fellow at the Bank of England. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.