Does Historical Performance Predict Future Performance?
Financial Analysts Journal 
Ronald N. Kahn and Andrew Rudd
November 1995, Vol. 51, No. 6: 43-52
(doi: 10.2469/faj.v51.n6.1948)

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Abstract

An investigation of the persistence of mutual fund performance indicates that investors need more than past performance numbers to pick future winners. In this study, style analysis was used to separate fund total returns into style and selection components. Performance was defined in terms of total returns, selection returns, and information ratios (ratios of selection return to selection risk). For each fund type, two out-of-sample periods were established to investigate persistence of performance from one period to the next using regression analysis and contingency tables. The evidence supported persistence only for fixed-income fund performance. This persistence is beyond any effects of fund fees and expenses or data base survivorship bias. Unfortunately, this persistence edge cannot overcome the average underperformance of fixed-income funds resulting from fees and expenses.


Topical Index Keywords

Private Wealth Management
    Mutual Fund Studies
Performance Measurement and Evaluation
    Manager Selection

Author Information

Ronald N. Kahn is director of research at BARRA.

Andrew Rudd is CEO of BARRA.


Cited by

Christian Diller and Christoph Kaserer (2009). "What Drives Private Equity Returns?- Fund Inflows, Skilled GPs, and/or Risk?." European Financial Management, 15:3, 643-675.
Online publication date: 1-Jul-2009.
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Luis Ferruz, Luis Vicente, and Laura Andreu (2009). "Performance persistence and its influence on money and investor flows into Spanish pension plans." Review of Quantitative Finance and Accounting, 32:1, 85-100.
Online publication date: 1-Feb-2009.
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Luis Ferruz, José Luis Sarto, and Laura Andreu (2008). "Do asymmetric risk metrics influence performance persistence?." Journal of Derivatives & Hedge Funds, 14:1, 42-49.
Online publication date: 1-Jun-2008.
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Luis Ferruz, Luis Vicente, and Laura Andreu (2007). "Performance Persistence of Spanish Pension Funds: The Best Winners and Losers Usually Repeat." The Geneva Papers on Risk and Insurance Issues and Practice, 32:4, 583-594.
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Paul Cox (2007). "Should a financial service provider care about trust? An empirical study of retail saving and investment allocations." Journal of Financial Services Marketing, 12:1, 75-87.
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Luis Ferruz, Luis A. Vicente, and Laura Andreu (2007). "Identifying differences in the performance persistence of pension plans." Pensions: An International Journal, 12:3, 131-137.
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Greg N Gregoriou and Neal E Duffy (2006). "Hedge funds: A summary of the literature." Pensions: An International Journal, 12:1, 24-32.
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Chris Bilson, Angela Frino, and Richard Heaney (2005). "Australian retail fund performance persistence." Accounting and Finance, 45:1, 25-42.
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Jeffrey C. Strieter and Sandeep Singh (2005). "The determinants of acquisition of outside investment management service providers in public and corporate pension plans and endowments." International Journal of Bank Marketing, 23:3, 218-236.
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Martina K. Bers and Jeff Madura (2000). "The Performance Persistence of Closed-End Funds." The Financial Review, 35:3, 33-52.
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