Return Persistence and Fund Flows in the Worst Performing Mutual Funds

Return Persistence and Fund Flows in the Worst Performing Mutual Funds

By Jonathan B. Berk, Ian Tonks
April 2007Working Paper No. 3150

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.