THE OPEN-END FUND

Performance Persistence of American Open-end Mutual Fund

Acknowledgement

I would like to express my thanks to my advisor, for his suggestions, comments, patience and understanding. Very special thanks to my parents, my father, my mother, my brother and my sister who were continuously supporting me throughout my life and leaving me free in all my decisions. I would also like to thank my colleagues for his technical support whenever I needed. I would like to thank to Department, all the university managers, teachers and students with whom I have worked.

Abstract

Performance persistence in US open-end mutual funds is a contentious issue. This paper examines the performance persistence by analyzing monthly returns of mutual funds under nine investment styles over the periods of January 2000 to December 2011. We find that there is some evidence to support the persistence of mutual fund performance. Albeit this, a zero-investment best-minus-worst strategy does outperform the market with a certain level of consistency. In our study, we find some evidence to support the performance persistence of US open-end mutual funds evaluate that does American mutual fund have performance persistence weekly, monthly, semiannually and annually?

Table of Contents

Acknowledgement2

Abstract3

Table of Contents4

Introduction5

Mutual funds in Untied States6

Data9

Methodology And Models10

The Capital Asset Pricing Model10

Carhart Four-Factor Pricing Model11

Portfolio Return Construction Methodology12

Empirical Results/Findings13

Conclusion27

The Open-End Fund Discount and Performance Persistence

Introduction

It is commonly believed that investors buy mutual funds with superior track records since they believe that past winners outperform the market. Empirical studies (Patel, Zeckhauser and Hendricks, 1992; Sirri and Tufano, 2005) have shown evidence to support this phenomenon, which is referred to as the "hot hand" effect (Hendricks, Patel and Zeckhauser, 2000). Jegadeesh and Titman's (2000) empirical study also suggests that there is a positive persistence in mutual fund performance. The authors utilize a trading strategy of buying last period's winners and selling last period's losers to realize positive returns in the following 12 months after the formation of said strategy. In addition, Carhart (2004) ascertains that under-performing funds persistently yield low returns over multiple years while last year's top performers can sustain their higher-than-average performance for another year, but not any years thereafter.

In this paper, we separately investigate nine different styles of US open-end mutual funds covering the periods from 2000 to 2011. Following Carhart's (2004) statistical approach, we utilize two models in this study: the Sharpe (1964) - Lintner (1965) capital asset pricing model (CAPM) and Carhart's (2004) four-factor pricing model (FFPM) to test our mutual funds' performance persistence.

In our study, we find some evidence to support the performance persistence of US open-end mutual funds evaluate that does American mutual fund have performance persistence weekly, monthly, semiannually and annually? Portfolios consisting of prior year's best performing mutual funds can generate positive mean returns in the following year. We also obtain a similar result to Carhart's (2004) that poor performing funds have the tendency to under-perform as in the preceding year. We employ Jegadeesh and Titman's (2000) zero-investment best-minus-worst strategy to long portfolio 1 and short sell portfolio 10 (where ...