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Performance persistence of fixed income funds droms

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  • 1. JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 347PERFORMANCE PERSISTENCE OF FIXED INCOME MUTUAL FUNDSBy William G. Droms and David A. Walker*Abstract The "winner-winner, winner-loser, gone" methodology allows tests for short-term performancepersistence for government and corporate fixed income mutual funds from 1990 to 1999. Persistenceoccurs when “winner” (loser) funds remain “winner” (loser) funds. If intermediate-term (long-term)bond returns are higher than long-term (intermediate-term) bond returns for successive years, the z-statistic is positive. Persistence is negative in the opposite case, and the pattern holds for longer lagperiods. Statistical significance and consistency between the sign of persistence and bond returnsindicates persistent returns on bond funds, but the nature of persistence is driven by changes ininterest rates. (JEL G11) Introduction This study provides an analysis of performance persistence of fixed income mutual funds. Fundperformance is defined to “persist” if, for consecutive time periods, the fund return is above (below)the median of all funds after being above (below) the median in the previous period. Studies byGrinblatt and Titman (1992), Hendricks et al. (1993), Goetzmann and Ibbotson (1994), Brown andGoetzmann (1995), Malkiel (1995), Elton et al. (1996), Carhart (1997), and Droms and Walker (2001)have tested the persistence of equity mutual fund total returns over time periods ranging from 10 to 31years. Grinblatt and Titman (1992) find evidence that differences in performance between funds persistover time and that this persistence is consistent with the ability of fund mangers to earn abnormalreturns. Hendricks et. al. (1993) find that the relative performance of no-load, growth-oriented mutualfunds persists in the near term, with the strongest evidence for a one-year time horizon. Goetzmannand Ibbotson (1994) find strong evidence that past mutual fund performance predicts futureperformance. Their data suggest that both "winners" (funds with returns above the median) and"losers" (funds with returns below the median) are likely to repeat, even when performance is adjustedfor relative risk. Brown and Goetzmann (1995) find that relative risk-adjusted performance of mutualfunds persists but that persistence is mostly due to funds that lag the S&P 500; the implication of theirresults for investors is that the persistence phenomenon is a useful indicator of which funds to avoid. Malkiel (1995) finds that funds in the aggregate have underperformed benchmark portfolios evenbefore deduction of expenses and that while considerable performance persistence existed during the1970s, there was no consistency of performance during the 1980s. Elton et al. (1996) find that risk-adjusted performance tends to persist; funds that did well in the past tend to do well in the future.Using Jensens alpha as a measure of risk-adjusted performance, their paper shows that primarily one-year alphas provide information about future performance and that portfolios based on pastperformance significantly outperform equally weighted portfolios of funds. Carhart (1997) develops a31-year data sample free of survivor bias and demonstrates that common factors in stock returns andinvestment expenses almost completely explain persistence in equity mutual funds’ mean and risk-adjusted returns; his results do not support the existence of skilled or informed mutual fund managers. *McDonough School of Business, Georgetown University, Washington, DC 20057; dromsw@msb.edu; walkerd@msb.edu. The authors would like to acknowledge the research assistance of Michael Serra and Michael Wieczorek. This research wassupported in part by the McDonough School of Business and the Capital Markets Research Center at Georgetown University.
  • 2. 348 JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006Droms and Walker (2001) find strong short-term performance persistence for international equityfunds, but no performance persistence for holding periods of two, three, or four years. These persistence studies focus on equity mutual funds. There is very little published on thepersistence of fixed income mutual funds. Most of the recent literature, such as Busse (2001), Choi andMurthi (2001), and Wermers (2000), focus on performance of stock mutual funds. Chan et al. (2003)examine the persistence of long-term stock growth rates on the basis of median operating performance.Several other recent papers, such as ter Horst and Verbeek (2000), examine various properties ofperformance measures and estimators. The current study examines performance persistence of fixedincome mutual funds. The null hypothesis is that there is no persistence between time periods. Whetheror not new funds enter the market, winners in period t are examined to test whether they are winners inperiod t+j, for j=1,2,3,4. MethodologyResearch Issue This study applies the successive “winner-winner, winner-loser” methodology applied inGoetzmann and Ibbotson (1994), Brown and Goetzmann (1995), and Malkiel (1995). Funds areranked ordered by one-year total returns with 50 percent of the funds with the highest returns labeled“winners” and 50 percent of the funds with the lowest returns labeled “losers.” Funds that ceasedoperations in the subsequent year are identified as “gone.” Two-by-three tables are constructed toidentify funds that are “winners” and “losers” in one year and then “winners,” “losers,” or “gone” insuccessive years. Persistence is measured by whether winners in one period remain winners in the nexttest period. Statistical significance tests (z-scores) are employed following the procedure described inBrown and Goetzmann (1995).Approach To examine the persistence of returns for N funds, the returns are rank ordered from the lowestreturn R1 to the highest return RN so that the returns form the vector, R = [R1 , . . . , R.5N , R.5N+1, . . .,RN]. The lower half of the returns, R1 , . . . , R.5N , define the funds that are “losers” and the upper halfof the returns, R.5N+1, . . . RN, designate the funds that are called the “winners.” Funds with returnsequal to the median are also called “winners.” Let L = [R1 , . . . , R.5N] and W = [R.5N+1, . . ., RN].If only these same funds operate for the next period, the definition of persistence is quite simple. Inthat case, each element of L either remains in the lower half of the returns or shifts to the upper half ofthe returns. Likewise, each element of W remains a member of W or does not have returns among thetop half of the rank ordering. If a fund is in L for consecutive periods, it is defined as a loser-loser(LL). If a fund remains in the upper half of the returns, it is a winner-winner (WW). A fund that shiftsfrom L to W is a loser-winner (LW) and a fund that shifts from W to L is a winner-loser (WL). Fundsthat cease operations that were “winners” (“losers”) during the previous period are designated aswinner-gone (WG) or loser-gone (LG). In matrix form, the path can be described as period t+1 winner loser gone winner WW WL WG period t loser LW LL LG The classification is somewhat complex for two reasons. Between periods t and t+1, there couldbe an increasing number of funds or funds could close. Suppose M new funds are operating in periodt+1, then M+N funds are to be ranked. If K funds close, M+N-K funds are to be ranked. After theM+N-K funds are ranked, the winners from period t are identified as winners again or losers and the
  • 3. JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 349losers from period t are identified as repeat losers or winners. The funds that are new in period t+1 areranked, but the matrix path will include only the funds that operate in the consecutive periods. Data Annual mutual fund data are collected for a total of 797 corporate and government fixed incomefunds that were in operation during the 10-year period from 1990 through 1999. There were a total of314 funds operating at the beginning of 1990; 175 were government funds and 139 were corporatefunds; 271 funds ceased operations over the 10-year period while 483 new funds began operations.The data set consists of annual total return data on these funds from the annual WiesenbergerInvestment Companies Service. Returns are measured as the percentage annualized total rate of returnfor the fund (treating all dividends as reinvested), net of fees and expenses and before load charges,where applicable.Fund Characteristics Table 1 provides the general characteristics of the data set. The average numbers of governmentand corporate funds over the period were 219 and 247, respectively. The maximum numbers of fundswere 255 government funds in 1995 and 316 corporate funds in 1998. By the end of 1999, the numberof government funds had declined to 221, 15 percent below its 1995 peak, while the number ofcorporate funds remained near its peak. Table 1: Bond Fund Returns Mean, Median and Benchmark Returns (%): 1990-1999Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 MeanNumber of New Government Funds n.a. 9 16 42 48 34 23 10 8 3 21Number of "Gone" Government Funds n.a. 11 7 14 14 23 26 20 18 14 16Total Number of Government Funds 175 173 182 210 244 255 252 242 232 221 219Mean Total Return on Government Funds 7.89% 13.99% 6.14% 8.46% -3.39% 15.57% 2.77% 7.85% 7.64% -1.04% 6.6%Median Total Return on Government Funds 8.50% 14.00% 6.10% 7.70% -3.20% 15.00% 2.95% 8.00% 7.40% -0.90% 6.6%Number of New Corporate Funds n.a. 17 19 57 55 60 32 22 21 7 32Number of "Gone" Corporate Funds n.a. 6 7 9 4 20 21 19 20 18 14Total Number of Corporate Funds 139 150 162 210 261 301 312 315 316 305 247Mean Total Return on Corporate Funds 16.09% 15.92% 7.33% 9.95% -3.08% 15.84% 4.03% 8.39% 6.68% -0.27% 8.1%Median Total Return on Corporate Funds 16.00% 15.80% 7.10% 9.75% -3.30% 16.30% 3.60% 8.40% 7.05% -0.80% 8.0%Return on Short-Term Treasury Bills 7.81% 5.60% 3.51% 2.90% 3.90% 5.60% 5.21% 5.26% 4.86% 4.68% 4.9%Return on Intermediate-Term Government Bonds 9.73% 15.46% 7.19% 11.24% -5.14% 16.80% 2.10% 8.38% 10.21% -1.77% 7.4%Return on Long-Term Government Bonds 6.18% 19.30% 8.05% 18.24% -7.77% 31.67% -0.93% 15.85% 13.06% -8.96% 9.5%Return on Long-Term Corporate Bonds 6.78% 19.89% 9.39% 13.19% -5.76% 27.20% 1.40% 12.95% 10.76% -7.45% 8.8%Notes: Benchmark Data from Stocks, Bonds, Bill and Inflation Yearbook 2003, (Chicago, Ibbotson Associates).Table 1 shows thetotal number of funds in the sample each year, the number of new funds introduced each year, the mean and median returns onthe funds in the sample, and the comparable return on the benchmark for each year.Returns The mean annual return was 6.6 percent on government funds and 8.1 percent on corporate funds;the median returns were virtually the same. There was high variance in the returns on both types offixed income funds. The range of mean returns on corporate funds was from 16.09 percent in 1990 to–3.08 percent in 1994. For government funds, the range of mean returns was 13.99 percent in 1991 to–3.39 percent in 1994. Benchmark returns on Treasury bills, intermediate-term government bonds, long-term government
  • 4. 350 JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006bonds, and long-term corporate bonds from Ibbotson Associates are shown in Table 1 to provide abasis of comparison for bond funds relative to the overall bond market. Bond market returns showsimilar patterns to the aggregate groups of bond mutual funds, although percentage variations areslightly more volatile. The average return on Treasury bills was 4.9 percent over the 1990-99 period,which was less than the average returns on longer-term bonds and bond funds. The 9.5 percent returnon long-term government bonds was the highest average return among these instruments.Survivor Bias One of the key issues to be considered for every time series analysis of mutual fund returns ispotential survivor bias. This bias is minimal in this study because each new fund is added to thedatabase and merging funds continue to be included. The only bias is that, if any funds closed and didnot merge with an existing fund, that fund would not have returns to be included for the year in whichoperations ceased. A total of 271 funds ceased operations while 483 new funds were added. If a fund in the database merged into another fund also in the database, the surviving fund iscarried forward and the acquired fund is dropped entirely. If a fund in the database merged into a fundnot in the database or if the fund closed, the fund is dropped. Complete total return data were thenassembled for all funds that were in the database during the 10-year period of 1990-1999. Including alloperating funds (new and old) in the returns ranking in each period and separating funds that did notcontinue operations avoids virtually all potential survivor bias. ResultsPersistence of Returns Tables 2 through 5 present the results of persistence tests. For each table, persistence tests areprovided for government bonds in Panel A and for corporate bonds in Panel B. Table 2 provides thetests for persistence between consecutive periods -- t to t+1. Tables 3, 4 and 5 provide the testsbetween periods t and t+2 (two year lag), t and t+3 (three year lag), and t and t+4 (four year lag),respectively. The significance of persistence of returns is tested by calculation of a z-statistic, which isdistributed normally with a zero mean and a standard deviation of 1.0. A large positive z-statistic isobtained when a high percentage of the “winners” in one period remain “winners” in the next periodtested. When a high percentage of “winners” in one period become “losers” in the next period, a largenegative z-statistic is found. Small z-statistics are determined when there is no clear pattern in thereturns. If exactly the same winners remain winners and the same losers remain losers between twoperiods, the z-statistic would be zero. Statistics are judged at the five- percent level of significance, butin virtually all cases, the z-statistics are statistically significant at the .01 level, and many aresignificant at the .001 level. Table 2 shows that combined results for a one-year lag period are highly significant anddemonstrate both positive and negative performance persistence among both government bond (PanelA) and corporate bond (Panel B) funds. Looking at the t+1 data in aggregate, approximately 20percent of bond fund winners are consecutive winners for both government (374 out of 1,965) andcorporate (447 out of 2,166) bond funds. The two types of funds have comparable percentages amongwinner-loser (28 percent), loser-winner (28 percent), and loser-loser (18 percent). Given thedifferences in returns from year to year in Table 1, it is surprising to find the similar percentagesmoving from one classification to another for both types of funds. Except for the first period (1990-1991) for government bond funds, the z-statistics for bothgovernment and corporate bond funds are statistically significant. The interesting result is that thesigns of the z-statistics fluctuate from significantly positive to significantly negative and the sign of thez-statistics are the same for both classes of funds for all pairs of years. Even for the first pair of yearswhere the z-statistic for government bond funds is not statistically significant, it has the same negativesign as does the significant statistic for the corporate bond fund in 1990-91. For both classes of funds,
  • 5. JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 351the signs are negative for the first pair of years, positive for the next two pairs, negative for the nextfour pairs, positive for one year, then negative for the last pair of years (1998-99). When all of the one-period differences are combined, the z-statistics are –9.045 and –7.288, respectively, for governmentand corporate bond funds. The negative signs indicate that, at least in aggregate, winners in period tare highly likely to become losers in the next period. Table 2a: Government Bond Return Persistence: 1 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- Cross-Product SD Z Year 1 Year 2 Funds Winner Loser Winner Loser Gone Gone Ratio Statistic a b c d1990-91 175 173 9 38 46 44 36 4 7 0.676 0.314 -1.2481991-92 173 182 16 55 30 31 50 2 5 2.957 0.322 3.3661992-93 182 210 42 62 24 27 55 5 9 5.262 0.336 4.9401993-94 210 244 48 14 85 78 19 6 8 0.040 0.386 -8.3411994-95 244 255 34 24 85 94 18 13 10 0.054 0.346 -8.4351995-96 255 252 23 32 87 84 26 9 17 0.114 0.305 -7.1211996-97 252 242 10 34 84 83 31 8 12 0.151 0.293 -6.4571997-98 242 232 8 88 28 25 83 5 13 10.434 0.315 7.4481998-99 232 221 3 27 84 84 23 5 9 0.088 0.323 -7.524 Total n 1965 374 553 550 341 57 90 0.419 0.096 -9.045 Total % 100.0% 19.0% 28.1% 28.0% 17.4% 2.9% 4.6% Table 2b: Corporate Bond Return Persistence: 1 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- Cross-Product SD Z Year 1 Year 2 Funds Winner Loser Winner Loser Gone Gone Ratio Statistic a b c d1990-91 139 150 17 23 44 49 17 2 4 0.181 0.381 -4.4771991-92 150 162 19 54 19 21 49 2 5 6.632 0.373 5.0711992-93 162 210 57 60 18 25 50 3 6 6.667 0.364 5.2171993-94 210 261 55 25 78 75 28 2 2 0.120 0.319 -6.6521994-95 261 301 60 33 90 91 27 8 12 0.109 0.299 -7.4181995-96 301 312 32 47 98 92 43 6 15 0.224 0.256 -5.8381996-97 312 315 22 61 86 86 60 9 10 0.495 0.237 -2.9641997-98 315 316 21 98 53 49 95 7 13 3.585 0.245 5.2121998-99 316 305 7 46 106 106 40 6 12 0.164 0.256 -7.064 Total n 2166 447 592 594 409 45 79 0.520 0.090 -7.288 Total % 100.0% 20.6% 27.3% 27.4% 18.9% 2.1% 3.6%Notes: Table 2 shows performance persistence with a one-year lag. Winners and losers are ranked relative to the median fund inyear one and re-ranked in year two. Winners are funds with returns above the median and losers are the funds with returns belowthe median. Funds ceasing operations are identified as gone. Tables 3 through 5 show the analogous tests with successive performance lagged by two, threeand four years, respectively. Table 3 indicates an interesting persistence difference across two timeperiods, in contrast to single period differences. In Table 3, the aggregate z-statistics for bothgovernment and corporate bond funds are positive and statistically significant in contrast to thesignificant and negative z-statistics for one period lags in Table 2. The aggregate z-statistics in Table 3are 4.668 for government bond funds and 2.770 for corporate bond funds. For the two-year lag periodsreported in Table 3, all of the z-statistics are statistically significant and 9 of the 16 individual z–statistics are positive, whereas 12 of the 18 z-statistics are negative in Table 2.
  • 6. 352 JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 Table 3a: Government Bond Return Persistence: 2 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 3 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-92 175 182 25 51 32 33 41 5 13 0 1.980 0.325 2.1031991-93 173 210 58 63 16 18 56 8 12 1 12.250 0.390 6.4311992-94 182 244 90 24 57 45 30 10 16 2 0.281 0.339 -3.7501993-95 210 255 82 70 23 29 56 12 20 5 5.877 0.332 5.3371994-96 244 252 57 71 28 29 74 23 19 7 6.470 0.313 5.9711995-97 255 242 33 94 16 14 86 18 27 1 36.089 0.395 9.0741996-98 252 232 18 35 74 75 31 17 20 1 0.195 0.296 -5.5121997-99 242 221 11 27 81 80 22 13 19 0 0.092 0.328 -7.294Total n 1733 1838 435 327 323 396 106 146 1733 1.631 0.105 4.668Total % 100.0% 25.1% 18.9% 18.6% 22.9% 6.1% 8.4% 100.0% 100.0% Table 3b: Table 3b: Corporate Bond Return Persistence: 2 Year Lag Corporate Bond Return Persistence: 2 year lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 3 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-92 139 162 36 24 39 44 19 7 7 0 0.266 0.378 -3.5091991-93 150 210 76 57 13 19 46 5 10 1 10.615 0.411 5.7491992-94 162 261 112 25 53 45 28 3 7 2 0.294 0.342 -3.5871993-95 210 301 115 82 16 20 74 7 11 6 18.963 0.372 7.9151994-96 261 312 92 80 35 32 78 16 20 5 5.571 0.292 5.8871995-97 301 315 54 108 31 22 102 12 26 2 16.152 0.311 8.9431996-98 312 316 43 37 96 103 39 21 16 2 0.146 0.270 -7.1331997-99 315 305 28 42 99 100 39 17 18 3 0.165 0.264 -6.822Total n 1850 2182 455 382 385 425 88 115 1850 1.315 0.099 2.770Total % 100.0% 24.6% 20.6% 20.8% 23.0% 4.8% 6.2% 100.0%Notes: Table 3 shows performance persistence with a two-year lag. Winners and losers are ranked relative to the median fund inyear one and re-ranked in year three. Winners are funds with returns above the median and losers are the funds with returns belowthe median. Funds ceasing operations are identified as gone. Tables 4 and 5 reveal that persistence in the aggregate returns for government and corporate bondfunds is not statistically significant across the 1990 to 1999 period. For three-year lag periods (Table4), three of the statistically significant z-statistics are positive and four are negative for each categoryof fund. For four period horizons (Table 5), half of the z-statistics are significantly positive and halfare significantly negative for each fund category. Comparing government and corporate bond funds,for each subperiod in Tables 4 and 5, the sign of the z-statistics is the same for the two types of bondfunds; when there is a positive z-statistic for a subperiod for one type of fund, the sign of the statisticfor the other type of fund is the same. For the particular subperiods for three year (Table 4) and four-year (Table 5) persistence periods, most of the z-statistics are large enough to reject the hypothesis ofno persistence. Of the 14 subperiods examined in Table 4, 12 indicate significant persistence. Of the12 subperiods identified in Table 5, there was significant persistence for 10 subperiods.
  • 7. JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 353 Table 4a: Government Bond Return Persistence: 3 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 4 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-93 175 210 67 36 41 41 26 11 20 1 0.557 0.339 -1.7261991-94 173 244 107 14 58 48 21 15 17 4 0.106 0.396 -5.6711992-95 182 255 125 56 19 26 43 16 22 14 4.874 0.364 4.3561993-96 210 252 105 31 56 53 24 18 28 17 0.251 0.333 -4.1591994-97 244 242 67 28 68 75 20 26 27 16 0.110 0.337 -6.5501995-98 255 232 41 76 29 27 64 23 36 5 6.212 0.317 5.7671996-99 252 221 22 83 18 17 81 24 29 3 21.971 0.373 8.294Total n 1491 1656 324 289 287 279 133 179 1491 1.090 0.117 0.737Total % 100.0% 21.7% 19.4% 19.2% 18.7% 8.9% 12.0% 100.0% Table 4b: Corporate Bond Return Persistence: 3 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 4 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-93 139 210 93 26 35 43 16 9 10 3 0.276 0.391 -3.2901991-94 150 261 131 20 50 42 21 5 12 3 0.200 0.376 -4.2801992-95 162 301 172 57 18 24 44 6 13 14 5.806 0.371 4.7431993-96 210 312 147 40 53 49 39 12 17 16 0.601 0.300 -1.7001994-97 261 315 115 32 75 77 25 24 28 9 0.139 0.312 -6.3281995-98 301 316 75 85 49 39 75 17 36 7 3.336 0.267 4.5171996-99 312 305 50 96 33 34 101 27 21 9 8.642 0.283 7.623Total n 1535 2020 356 313 308 321 100 137 1535 1.185 0.111 1.529Total % 100.0% 23.2% 20.4% 20.1% 20.9% 6.5% 8.9% 100.0%Notes: Table 4 shows performance persistence with a three-year lag. Winners and losers are ranked relative to the median fund inyear one and re-ranked in year four. Winners are funds with returns above the median and losers are the funds with returns belowthe median. Funds ceasing operations are identified as gone. Table 5a: Government Bond Return Persistence: 4 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 5 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-94 175 244 116 41 32 19 41 15 27 5 2.765 0.364 2.7921991-95 173 255 141 54 13 23 43 20 20 19 7.766 0.403 5.0901992-96 182 252 148 31 40 31 29 20 31 27 0.725 0.352 -0.9131993-97 210 242 115 58 24 23 51 23 31 29 5.359 0.349 4.8061994-98 244 232 77 32 56 64 26 34 32 23 0.232 0.321 -4.5461995-99 255 221 44 25 76 68 18 27 41 10 0.087 0.351 -6.948Total n 1239 1446 241 241 228 208 139 182 1239 0.912 0.132 -0.694Total % 100.0% 19.5% 19.5% 18.4% 16.8% 11.2% 14.7% 100.0% Table 5b: Corporate Bond Return Persistence: 4 Year Lag Year Total Funds New Winner- Winner- Loser- Loser- Winner- Loser- New- Cross-Product SD Z Year 1 Year 5 Funds Winner Loser Winner Loser Gone Gone Gone Ratio Statistic a b c d1990-94 139 251 148 38 22 16 43 10 10 6 4.642 0.397 3.8681991-95 150 301 191 50 16 21 38 9 16 15 5.655 0.396 4.3801992-96 162 312 203 33 40 34 27 8 20 25 0.655 0.349 -1.2121993-97 210 315 159 70 18 24 59 17 22 25 9.560 0.358 6.2991994-98 261 316 137 42 58 59 39 31 32 19 0.479 0.289 -2.5471995-99 301 305 82 37 93 83 27 21 40 17 0.129 0.295 -6.938Total n 1223 1800 270 247 237 233 96 140 1223 1.075 0.128 0.565Total % 100.0% 22.1% 20.2% 19.4% 19.1% 7.8% 11.4% 100.0%Notes: Table 5 shows performance persistence with a four-year lag. Winners and losers are ranked relative to the median fund inyear one and re-ranked in year five. Winners are funds with returns above the median and losers are the funds with returns belowthe median. Funds ceasing operations are identified as gone.
  • 8. 354 JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 The variation in the period-to-period signs of the z-statistics appears to be attributable to changesin returns in the bond market. In particular, comparing benchmark bond market returns in Table 1 toone-year persistence periods in Table 2, the data show that if intermediate-term bond returns are higherthan long-term bond returns for successive years, then the z-statistic is positive. Similarly, if long-termbond returns are higher than intermediate-term bond returns in successive years, persistence ispositive. This pattern holds for all pairs of years. By contrast, if higher returns on intermediate bondsare followed by a year of higher returns on long-term bonds, or if higher returns on long bonds arefollowed by a year of higher returns on intermediate bonds, then persistence is negative. This patternalso holds for all pairs of years. This pattern holds for all pairs of two-, three- and four-year lag periods for which the z-statistic isstatistically significant. There is only one exception to the pattern: government funds in 1990-92, aperiod for which the government bond fund z-statistic was opposite in sign from the corporate bondfunds and was not statistically significant. Summary and Conclusions This study presents the results of an analysis of fixed income mutual fund performance persistencefor government and corporate bond funds. The study applies the "winner-winner, winner-loser"methodology developed by Goetzmann and Ibbotson (1994), Brown and Goetzmann (1995) andMalkiel (1995) to test for short-term performance persistence in government and corporate bond fundsover the 10-year period from 1990 to 1999. When new funds begin operating, they are included in the analysis so that a funds’ persistence isranked relative to all funds, new and continuing, operating in each time period. This appears to make itmore difficult to find statistical significance of persistence. Survivorship bias is minimal in this studybecause each new fund is added to the database, merging funds continue to be included and funds thatcease to exist are separated for the analysis. The only bias is that, if any funds closed and did notmerge with an existing fund, that fund would not have returns to be included. Government and corporate bond funds exhibit remarkable performance persistence. Performancepersistence is statistically significant for all but one of 18 one-year lag periods and the signs of the z-statistics are the same for both categories of funds. Variation in the period-to-period signs of the z-statistics appears to be attributable to changes in returns in the bond market. In particular, the datashow that if intermediate-term (long-term) bond returns are higher than long-term (intermediate-term)bond returns for successive years, then the z-statistic is positive. By contrast, if higher returns onintermediate (long) bonds are followed by a year of higher returns on long (intermediate) bonds, thenpersistence is negative. This pattern of persistence also holds for all pairs of two-, three- and four-yearlag periods for which the z-statistic is statistically significant. There is only one exception to thepattern: government funds in 1990-92, a period for which the government bond fund z-statistic wasopposite in sign from the corporate bond funds and was not statistically significant. The combination of high levels of statistical significance and the remarkable consistency in therelationship between the sign of persistence and bond market returns supports the conclusion thatreturns on bond funds are strongly persistent, but that the nature of persistence (i.e., “normal” vs.“perverse” persistence) is driven by changes in interest rates. As changes in market interest rates causemarket leadership to change (i.e., higher returns to intermediate- or long-term bonds), the nature ofpersistence changes. Stability of market leadership is associated with positive persistence whilenegative persistence is associated with changes in market leadership.
  • 9. JOURNAL OF ECONOMICS AND FINANCE • Volume 30 • Number 3 • Fall 2006 355ReferencesBrown, S. J. and W. N. Goetzmann. 1995. "Performance Persistence." Journal of Finance 50: 679- 698.Busse, J. A. 2001. “Another Look At Mutual Fund Tournaments.” Journal of Financial and Quantitative Analysis 36: 53-74.Chan, L. E., J. Karceski, and J. Lakonishok. 2003. “The Level and Persistence of Growth Rates.” Journal of Finance 58: 643-684.Choi, Y. K. and B. P. S. Murthi. 2001. “Relative Performance Evaluation of Mutual Funds.” Journal of Business Finance & Accounting 28: 853-874.Carhart, M. M. 1997. “On Persistence in Mutual Fund Performance.” Journal of Finance 52: 57-82.Droms, W. G. and D. A. Walker. 2001. “Performance Persistence of International Mutual Funds.” Global Finance Journal 12: 237-248.Elton, E. J., M. J. Gruber, and C. R. Blake. 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance." Journal of Business 69: 133-157.Goetzmann, W. N. and R. G. Ibbotson. 1994. "Do Winners Repeat? Patterns in Mutual Fund Performance." Journal of Portfolio Management 20: 9-18.Grinblatt, M. and S. Titman. 1992. "The Persistence of Mutual Fund Performance." Journal of Finance 47: 1977-1984.Hendricks, D., J. Patel, and R. Zeckhauser. 1993. "Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-88.” Journal of Finance 48: 93-130.ter Horst, J. and M. Verbeek. 2000. “Estimating Short-Run Persistence in Mutual Fund Performance.” The Review of Economics and Statistics 82: 646-655.Malkeil, B. G. 1995. "Returns from Investing in Equity Mutual Funds 1971 to 1991." Journal of Finance 50: 549-572.Wermers, R. 2000. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses.” Journal of Finance 55: 1655-1694.Wiesenberger Investment Companies Service. 1991-2000. Investment Companies, New York, Warren, Gorham and Lamont.