Mutual Fund Performance and Changing Market Trends 1990-2001

Abstract

Mutual fund performance studies that examine returns over several years typically show that fund managers significantly underperform on a risk-adjusted basis. Using a four-factor risk-adjustment model, the authors of this article observe similar results during the bull market of the 1990s. However, they report that when they run their model using a moving 36-month window, they show that managers, on average, do not underperform on a risk-adjusted basis during the two bear markets that occurred within the full sample period 1990–2001. In fact, for some manager experience levels, they report significant positive risk-adjusted performance, on average, during the latest bear market. Contrary to some prior studies and popular belief, the level of risk-adjusted performance they find is not positively related to manager experience. The article's conclusions indicate that market trends rather than manager experience more clearly influence the level of risk-adjusted returns generated by fund managers, and thus investors should not pick mutual funds based solely on the tenure of the funds' managers.