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.

We show a positive relation between network centrality and risk-adjusted performance in a delegated investment management setting. More connected managers take more portfolio risk and receive higher investor flows, consistent with these managers improving their ability to exploit investment opportunities through their network connections. Greater network connections are shown to be particularly important in reducing the diseconomies of scale for large managers who are well connected. We also use the exogenous merger of two investment consultants, which creates a sudden change in the network connections of the managers they oversee, to provide evidence that a greater number of connections translates into better portfolio performance.