This paper uses a large sample containing the complete return histories of 2300UK openended mutual funds over a 23-year period to measure fund performance. We find some evidence of underperformance on a risk-adjusted basis by the average fund manager, persistenceof performance and the existence of a substantial survivor bias. Similar findings have been reported for US equity mutual funds. New findings not previously documented for other markets include evidence that mutual fund performance varies substantially across different asset categories, especially foreign asset categories. We also identify some new patterns in performance related to the funds' distance from their inception and termination dates: underperformance intensifies as the fund termination date approaches, while, in contrast, there is some evidence that funds (weakly) outperform during their first year of existence.

Most empirical studies suggest that mutual funds do not persistently outperform an appropriate benchmark in the long run. We analyze this lack of persistence in terms of two equilibrating mechanisms: fund flows and manager changes. Using data on actively managed US equity mutual funds, we find that if neither mechanism is operating, winner funds (top-decile ranked in previous year) continue to significantly outperform loser funds (bottom-decile ranked in previous year) by 4.08 percentage points per annum. However, the difference between previous winner and loser funds declines to zero within one year if the two mechanisms are acting together. Thus, equity mutual fund out- and underperformance are unlikely to persist in well-functioning financial markets.