Berk and Green (2004) make a theoretical argument that performance persistence should not exist since new money flows into well-performing mutual funds and there are diseconomies of scale, or because successful funds capture excess returns by raising fees. We find that performance prediction continues when we examine samples of larger and larger funds and that past performance predicts future performance for holding periods up to three years. Funds that outperform index funds of the same risk can be identified. We find that expense ratios are lower for large funds, and decrease as funds get larger or perform well.

Abstract In this paper, the authors use monthly holdings to study timing ability. These data differ from holdings data used in previous studies in that the authors’ data have a higher frequency and include a full range of securities, not just traded equities. Using a one-index model, the authors find, as do two recent studies, that management appears to have positive and statistically significant timing ability. When a multiindex model is used, the authors show that timing decisions do not result in an increase in performance, whether timing is measured using conditional or unconditional sensitivities. The authors show that sector rotation decisions with respect to high-tech stocks are a major contribution to negative timing.