On Persistence in Mutual Fund Performance

Carhart, Mark M.

doi:10.1111/j.1540-6261.1997.tb03808.x

Cited by 17,283Financial Markets and Investment StrategiesCorporate Finance and GovernanceFinancial Analysis and Corporate Governance

On Persistence in Mutual Fund Performance

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Carhart, Mark M.·1997·The Journal of Finance

DOI 10.1111/j.1540-6261.1997.tb03808.x

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Abstract

Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk‐adjusted returns. Hendricks, Patel and Zeckhauser's (1993) “hot hands” result is mostly driven by the one‐year momentum effect of Jegadeesh and Titman (1993) , but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst‐return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.

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The negative relation between turnover and net returns documented for individual investors also exists in mutual funds.
“Finally, it is worth noting that the negative relation between turnover and net returns that we document for individual investors also exists in mutual funds (Carhart (1997)).”
From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Carhart (1997)
The estimated bid-ask spread is close to the trading costs paid by open-end mutual funds from 1966 to 1993.
“Our estimate of the bid-ask spread is very close to the trading cost of 0.21 percent for purchases and 0.63 percent for sales paid by open-end mutual funds from 1966 to 1993 (Carhart (1997)).”
From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Carhart (1997)
Mutual fund holdings tilt toward growth stocks.
“Carhart (1997, Table III) documents that mutual fund holdings tilt toward growth stocks.”
From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Carhart (1997, Table III)
Mutual funds trade often and their trading hurts performance.
“Mutual funds trade often and their trading hurts performance (Carhart (1997)).”
From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Carhart (1997)
The growth or value preference of institutions is less obvious.
“As is the case for individual investors, the growth or value preference of institutions is less obvious.”
From Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors (2000) · cites this paper as Carhart (1997, Table III)
The Conclusion (page unavailable) compares persistence across aggressive-growth, long-term-growth, and growth-and-income mutual fund categories, but does not assess whether institutions prefer growth or value stocks. Searches for institutional growth-versus-value preferences and book-to-market measures found no passage addressing that claim. (LLM, conf=0.75)
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Common risk factors in the returns on stocks and bonds
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CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*
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THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]
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Research works printed but not linked: 2

Asness, Clifford S., 1994, Variables that explain stock returns, Unpublished Ph.D. dissertation, Graduate School of Business, University of Chicago, Chicago, Ill.
Carhart, Mark M., 1995a, Survivor bias and persistence in mutual fund performance, Unpub- lished Ph.D. dissertation, Graduate School of Business, University of Chicago, Chicago, Ill.

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Authors: Carhart, M. M.
Affiliations: University of Southern California (US)
Corresponding author: Carhart, Mark M.
Venue: The Journal of Finance
Publisher: Wiley
Published: 1997-03
Volume: 52
Issue: 1
Pages: 57-82
ISSN: 0022-1082 (ISSN-L)
1540-6261
DOI: 10.1111/j.1540-6261.1997.tb03808.x
OpenAlex: W2136120210
Cited by: 17,283
References: 30
Citations by year: 2026: 680 · 2025: 832 · 2024: 901 · 2023: 945 · 2022: 931 · 2021: 1004 · 2020: 1006 · 2019: 984 · 2018: 950 · 2017: 959 · 2016: 942 · 2015: 914 · 2014: 872 · 2013: 765 · 2012: 842
FWCI: 131.62
Type: journal article
Language: en
Open access: bronze
doi.org
Licence: onlinelibrary.wiley.com/termsAndConditions#vor (vor, 5527 d)
Locations: The Journal of Finance (publishedVersion)
RePEc: Research Papers in Economics (submittedVersion)
Topics: Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
Keywords: mutual fund performance, performance persistence, hot hand effect, momentum strategies, risk-adjusted returns, survivorship bias

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