The Persistence of Risk-Adjusted Mutual Fund Performance

Abstract

We examine predictability for stock mutual funds using risk- adjusted returns. We find that past performance is predictive of future risk-adjusted performance. Applying modern portfolio theory techniques to past data improves selection and allows us to construct a portfolio of funds that significantly outperforms a rule based on past rank alone. In addition, we can form a combination of actively managed portfolios with the same risk as a portfolio of index funds but with higher mean return. The portfolios of funds selected have small but statistically significant positive risk-adjusted returns during a period where mutual funds in general had negative risk-adjusted returns.

JEL Classification: G11