Chasing Mutual Fund Performance - Follow the Momentum?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
pkcrafter
Posts: 13078
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Chasing Mutual Fund Performance - Follow the Momentum?

Post by pkcrafter » Mon Sep 17, 2018 7:55 pm

Article some of you will probably like.

From CFA Institute.
We found the best-performing funds beat an equal-weight index of all equity mutual funds as well as the worst-performing funds by a handsome margin. Put another way: Performance chasing works.
https://blogs.cfainstitute.org/investor ... -momentum/


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

livesoft
Posts: 62720
Joined: Thu Mar 01, 2007 8:00 pm

Re: Chasing Mutual Fund Performance - Follow the Momentum?

Post by livesoft » Mon Sep 17, 2018 8:03 pm

It's like a self-fulfilling prophecy which are the best kind.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Toons
Posts: 12970
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Chasing Mutual Fund Performance - Follow the Momentum?

Post by Toons » Mon Sep 17, 2018 8:40 pm

"Put another way: Performance chasing works."

For Real? :shock:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

venkman
Posts: 700
Joined: Tue Mar 14, 2017 10:33 pm

Re: Chasing Mutual Fund Performance - Follow the Momentum?

Post by venkman » Mon Sep 17, 2018 8:50 pm

Moreover, our calculations did not include transaction costs, which are likely in excess of 1%. As a consequence, these results are more theoretical than practical.

And, if we impose a minimum holding period of one year, performance chasing looks far less appealing. The best- and worst-performing funds with one-year holding periods generated similar returns from 2000 to 2018, albeit with significant differences in performance at different times.

"Look! Our data mining found a thing that works in theory, but not in the real world. We probably should've just let it go at that, but we did all that work with the data mining, so we felt obligated to write an article about it..."

snailderby
Posts: 18
Joined: Thu Jul 26, 2018 11:30 am

Re: Chasing Mutual Fund Performance - Follow the Momentum?

Post by snailderby » Mon Sep 17, 2018 8:51 pm

Toons wrote:
Mon Sep 17, 2018 8:40 pm
"Put another way: Performance chasing works."

For Real? :shock:
Yes, according to the article, if you "select[] mutual funds based on their performance over the previous 12-months," rebalance your portfolio every month, and ignore transaction costs. But if you "select[] funds based on their three-year performance and h[o]ld them for one [or] three years," then the article found that the converse was true: the better past-performers tended to lose more in crashes, and the worse past-performers tended to do better going forward. In other words, momentum can persist for a while, but then mean reversion tends to kick in.

User avatar
Toons
Posts: 12970
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Chasing Mutual Fund Performance - Follow the Momentum?

Post by Toons » Tue Sep 18, 2018 7:47 pm

snailderby wrote:
Mon Sep 17, 2018 8:51 pm
Toons wrote:
Mon Sep 17, 2018 8:40 pm
"Put another way: Performance chasing works."

For Real? :shock:
Yes, according to the article, if you "select[] mutual funds based on their performance over the previous 12-months," rebalance your portfolio every month, and ignore transaction costs. But if you "select[] funds based on their three-year performance and h[o]ld them for one [or] three years," then the article found that the converse was true: the better past-performers tended to lose more in crashes, and the worse past-performers tended to do better going forward. In other words, momentum can persist for a while, but then mean reversion tends to kick in.
Ok Thanks :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Post Reply