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DISCUSSION PAPER PI-1009

WHY DOES MUTUAL FUND PERFORMANCE NOT PERSIST? THE IMPACT AND
INTERACTION OF FUND FLOWS AND MANAGER CHANGES

Wolfgang Bessler, David Blake, Peter Lückoff and Ian Tonks

This paper investigates the reasons for the lack of long-term persistence in the
investment performance of actively managed equity mutual funds. We document
that the responses of investors, fund managers, and investment management
companies to past performance have an important impact on future performance.
Conditioning on fund flows and manager changes allows us to predict future
performance of both past outperforming (winner) and past underperforming
(loser) funds. Recent winner funds, experiencing neither high inflows nor the
departure of a skilled fund manager, outperform by 3.60 percentage points based
on risk-adjusted returns in the following year, relative to winner funds suffering
from both effects. We also find that the performance of the worst performing
funds experiencing both the replacement of the fund manager (internal governance)
and high outflows (external governance) enjoy a subsequent increase in
performance of 2.40 percentage points in the following year, relative to loser
funds not experiencing these effects. Among loser funds, in particular, both
mechanisms appear to interact strongly.

JEL Classification: G28, G29, G32.

Keywords: Mutual Funds, Performance Persistence, Fund Flows, Manager Turnover.