This study analyzes the performance of 1,042 mutual funds from 1986 to 1995 to determine if fund managers with longer tenure (at least 10 years) generate higher risk-adjusted returns than less experienced managers. The results show: 1) Funds overall had positive risk-adjusted returns of 0.16% per month on average, but funds with long-tenured managers did not outperform those with less experienced managers. 2) Positive returns were largely due to a few crucial years common to all funds, not manager tenure. 3) A manager's ability to generate positive returns over 3 years did not indicate the ability to do so consistently in subsequent periods, regardless of tenure.

1. 224 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
Mutual Fund Managers:
Does Longevity Imply Expertise?
Bruce A. Costa and Gary E. Porter*
Abstract
We analyze the performance of 1,042 mutual funds from
1986 to 1995 to measure the relationship between manager
tenure and performance. Funds whose managers’ have at least
ten years tenure do not generate significantly higher excess
returns than funds with less experienced managers. The
excess returns of the best managers are not greater than those
of their less experienced colleagues. Regardless of tenure,
managers producing positive risk adjusted returns for three
years are not likely to repeat their performance in subsequent
periods. Our results provide further evidence that tenure
should not be a factor in selecting mutual funds. (JEL G20)
Introduction
While academics debate the ability of actively managed mutual funds to exhibit consistent
superior performance and attempt to identify the characteristics that evidence such ability, mutual
fund companies continue to tout the experience of their managers as a key factor in such
performance. For example, a recent advertisement in Smart Money magazine for the Federated
Kaufman Fund proclaims “EXPERIENCE COUNTS,” citing their 11 consecutive calendar years
of positive returns. Additionally, Morningstar, Inc., a provider of mutual fund data, suggests that
the manager’s tenure at a fund and reputation are valuable considerations in fund investing.1
Identifying any factors linked to consistent superior performance is vital to investors seeking
to maximize investment returns. Among the factors that researchers have linked to superior
performance are time frame and fund type. Goetzmann and Ibbotson (1994) demonstrate that
managers who perform better than their peers in one two-year period tend to perform better than
their peers in the subsequent two-year period. Volkman and Wohar (1996) show persistent
* Bruce A. Costa, School of Business Administration, University of Montana, Missoula, MT 59812-6808,
bruce.costa@business.umt.edu; Gary E. Porter, Boler School of Business, John Carroll University, University Heights, OH
44118-4581, gporter@jcu.edu. The authors wish to thank Eric J. Higgins, Keith Jakob, Jonathan Karpoff, Ajay Khorana,
David Peterson, and Pamela Peterson for their comments.
1
Morningstar’s website, www.morningstar.com, provides the following explanation for under manager name in its
data definitions section: “We also note the year in which the manager began running the fund. This information is useful
for determining how much of a fund's performance is attributable to its current management. Investors often wonder
whether they should redeem their shares in a fund when it changes managers. This question usually arises when a manager
with a great reputation leaves a fund.”

2. JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003 225
superior excess returns over a three-year investment period are directly related to persistence in
prior returns, and Grinblatt and Titman (1993) show that aggressive growth funds produce
persistent abnormal returns during their test period. Nearly all studies report that inferior returns
tend to show some degree of persistence.
In their examination of mutual fund performance, however, Elton, Gruber, and Blake (1996a)
and Carhart (1997) show that common factors in stock returns almost completely explain the
persistence in equity mutual fund performance. Carhart claims that studies indicating performance
persistence are mostly driven by a one-year momentum, “hot hands” effect, while the studies by
Malkiel (1995) and Elton, Gruber, and Blake (1996b) suggest that strong evidence of continued
superior performance is a consequence of fund survivorship, not necessarily management
expertise.
Gruber (1996) provides evidence that sophisticated investors can identify superior
management and are able to capture positive risk-adjusted excess returns because management
expertise is not priced. Moreover, these superior managers tend to generate persistent excess
returns, allowing investors to identify them and benefit from their future performance. Similarly,
Wermers (2000) concludes that active managers possess the expertise to add value because, on
average, they hold stocks that outperform the CRSP index, though he does not address
performance persistence.
The contribution of this paper is to test the notion that management tenure can be a proxy for
expertise, and hence a factor in explaining both magnitude and persistence in the performance of
actively managed funds. We test our hypothesis by controlling for the tenure of management in
our sample.2 We investigate the link between tenure and performance during the period 1986
through 1995. This period produced a variety of market conditions, including the crash of 1987, a
recession and bear market in 1991, followed by a bull market that extended through 1995.
Supporters of active management, including the funds themselves, argue that active management
is especially valuable during down markets. Our tests compare the excess, risk-adjusted returns of
funds managed by individuals with extensive experience at a fund, defined as having at least 10
years tenure, to the excess returns from a control sample of funds managed by individuals with
less tenure. To measure risk-adjusted excess fund returns, we apply a three-factor model based on
the mutual fund performance methodology of Gruber (1996), which, in turn, is consistent with the
comprehensive analysis of common stock returns by Fama and French (1993).
Our results indicate that excess returns are not a function of lengthy tenure at a specific fund.
The results show (1) during the period 1986 through 1995 our sample funds generate a positive,
significant, risk-adjusted monthly excess return (alpha) of 0.16 percent (1.89 percent, compounded
annually), but the performance of a sample of the 112 funds managed by individuals with at least
10 years tenure is not significantly different from the performance of the control sample consisting
of 930 funds managed by individuals with less than 10 years tenure; (2) significant, positive
alphas are the product of a few crucial years common to all funds; and (3) management’s ability to
produce positive alphas in each year of a three-year base period is not indicative of comparable
performance in subsequent periods, regardless of the tenure of the manager. In short, funds with
experienced managers are unlikely, on average, to produce risk-adjusted excess returns that are
greater, or more persistent, than funds with less experienced management. The evidence suggests
2
A small number of studies have addressed the relationship between managers and fund returns. Porter and Trifts
(1998) provide evidence that managers with lengthy tenure at a specific fund are unable to demonstrate consistent, superior
performance relative to their peers. Their study does not explicitly control for the risk factors cited by Fama and French,
however. Khorana (1996) examines the relationship between management replacement and prior performance. His study
also does not adjust returns to reflect the Fama and French factors.

3. 226 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
that, in general, claims that tenure implies expertise in generating superior returns should be
viewed with skepticism.
Our results suggest that the returns are not biased by an individual manager’s expertise over
an extended period at a specific fund. The results of the study are consistent with a number of
mutual fund performance studies. Our evidence is consistent with Porter and Trifts (1998). Using
percentile rankings to measure performance, they demonstrate funds with long-term associations
with managers do not outperform their peers in similar investment objectives. Our work extends
theirs by using excess returns, adjusted for the common factors associated with stock returns, to
identify superior managers and by comparing the performance of managers with at least 10 years
experience against all others in each year of the 10-year test period. Our results are also consistent
with studies by Fama and French (1993) and Elton, Gruber, and Blake (1996a) showing that
returns of these actively managed mutual funds are largely explained by common factors. These
factors are the risk premium on the market index, the difference in return between a small- and
large-capitalization stock portfolio, and the difference in return between a growth and a value
stock portfolio. The results are also consistent with those of Brown and Goetzmann (1995), who
find that relative performance depends on the time period observed.
The next secion presents our methodology, the third section describes our data, and the fourth
contains our results. The fifth summarizes our conclusions.
Methodology
The objective of our study is to determine whether investors, upon choosing a fund style, are
more likely to be rewarded with superior, risk-adjusted returns if they seek out managers with
longevity at a fund, and whether these managers are more likely to generate superior returns over
extended periods than their less experienced counterparts. To accomplish this objective our test
must measure the performance of two subsets of managers in each of the 10 sample years: those
with at least 10 years tenure at a fund and those with less.
Mutual fund performance studies use a variety of benchmarks. According to Elton, Gruber,
Das, and Hlavka (1993), whether the benchmarks are mutual funds with similar investment
objectives or popular indexes such as the S&P 500 for large growth stocks or the Russell 2000 for
small growth stocks, test results tend to overestimate actual performance results. Following Fama
and French (1993), who show that book-to-market ratio and size are factors in explaining stock
returns, Elton, Gruber, Das, and Hlavka (1993) and Gruber (1996) report that the failure to include
such variables can bias mutual fund performance.
To avoid the problems associated with using a single benchmark or index, we use the
methodology of Fama and French (1993), who employ a multi-factor model that accounts for the
impact of several risk premiums on equity returns. The methodology uses the risk premium on the
market index as an explanatory variable to capture the systematic impact of the market on fund
returns.3 The methodology also uses the spread between the return on a small- and a large-
capitalization index and the spread between a growth and a value stock index to account for the
influence of management style on fund returns.
The three-factor model4 we employ is:
3
We use the CRSP value-weighted index instead of the S&P 500 Index as a proxy for the market return because the
CRSP index includes dividends paid by the firms while the S&P 500 does not. This provides a more accurate measure of
return.
4
Our tests do not include a bond index because our study excludes bond funds. Fama and French (1993) noted that
bond related factors are only important in capturing the returns for bond funds and add no explanatory power to the model
when measuring the performance of equity.

4. JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003 227
Ri, t - Rf, t = α i + βM, i (Rm, t - Rf, t) + β S, i (Rs, t - Rl, t) + β G, i (Rg, t - Rv, t) + ε i, t (1)
where
Ri, t - Rf, t = excess return. The return on fund i in month t minus the
return on a 90-day T-bill for month t.
Rm, t - Rf, t = the return on the value-weighted CRSP index for month t minus the T-bill
return in month t.
Rs, t - Rl, t = the difference in the return between the small-capitalization index and the large-
capitalization index for month t.
Rg, t - Rv, t = the difference in the return between the high growth index and the value index
for month t.
αi = the monthly risk-adjusted excess return for fund i.
The appendix provides details for the construction of the indexes. Alpha (αi), the intercept
term, is the mean, monthly risk-adjusted excess return according to Jensen (1968). Alpha should
not be different from zero for any test period if the Efficient Market Hypothesis (EMH) holds.
Alpha will be positive “...if the portfolio manager has an ability to forecast security prices. Indeed,
it represents the average incremental rate of return on the portfolio per unit time which is due
solely to the manager’s ability to forecast security prices” (Jensen 1968, p. 394). To make valid
inferences about forecasting ability, however, alpha must be standardized by the standard error of
the estimate. According to Jensen, failure to distinguish alpha different from zero suggests that the
positive alpha was due to random chance, not superior forecasting ability. The standard error of
the estimate reflects the volatility of the manager’s excess returns; the lower the error rate, the
greater the implied forecasting ability.
Model 2 incorporates the three factors described above and adds a dummy variable, which
takes the value 1 if management has ten or more years experience and zero otherwise. Its
coefficient, βD , captures the marginal excess return generated by these managers.
Our tests of performance employ both individual fund alphas and alphas from portfolios of
mutual funds. Portfolios are constructed because investors can reduce volatility for a given
expected return by diversifying among managers and across investment objectives. Investing in a
portfolio of managers who have, in the past, demonstrated an ability to generate positive excess
returns for three years, for example, lowers the error rate, enhancing the possibility of capturing
significant excess returns if managers maintain their high level of performance.
Data
The sample consists of 1,042 funds operating during the period 1985 through 1995 and
satisfying the selection criteria listed below. The test sample contains 112 funds whose
management had 10 or more years tenure at a fund. The control sample contains 930 funds whose

5. 228 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
management tenure was less than 10 years.5 Monthly mutual fund returns and the length of each
manager’s association with a fund were obtained from the April 1997 Morningstar Principia
Plus™. The 1,042 funds represent six investment categories in Morningstar; Growth, Aggressive
Growth, Equity-Income, Growth and Income, Small Company, and Specialty Precious Metals. No
index funds, bond funds, or funds that invest primarily in foreign equities are included.
Nine of the 112 funds were managed concurrently by two individuals with the same tenure
during the test period. Two funds were managed by three individuals with the same tenure. Five
individuals managed two different funds concurrently and three individuals managed three funds
concurrently during the 10-year test period. Data for constructing indexes for the three-factor model
used in the study were obtained from the Center for Research of Security Prices (CRSP) and
Standard & Poor’s COMPUSTAT (see appendix for details). The proxy for the risk-free investment
in month t is the 12th root of the ask yield on 90-day Treasury bills at the end of month t-1.
Results
Do managers with longevity at a fund, in this case at least 10 years, generate greater and more
consistent risk-adjusted excess returns than their less experienced counterparts? This section
presents the results from performance tests of individual funds and portfolios of funds for the
period 1986-95 and for individual years within this period. We also form portfolios of funds
demonstrating superior performance relative to their peers during the period and examine an
investment strategy designed to capitalize on short-term performance persistence.
Excess Returns
Based on Model 1, the pooled sample of 1,042 funds generates a significant, monthly, risk-
adjusted, excess return of 0.15 percent, (t=17.61), or a compound annual excess return of 1.81
percent. Table 1, Panel A, presents results from Model 2 using a dummy variable that takes the
value 1 if the fund’s management has at least 10 years tenure and zero otherwise. The coefficient
βD in Panel A shows that the marginal excess return generated by these 112 funds is not
significantly different from that of the control group, -0.01 percent (t = - 0.28). The intercept
estimates the average monthly, risk-adjusted return for the 930 funds whose management had less
than 10 years tenure. This control group generates an average significant, monthly excess return of
0.16 percent (t = 17.20), for a compound annual excess return of 1.94 percent.6 Coefficient
estimates for the sensitivity of the funds’ portfolios to the risk factors discussed above indicate that
the excess returns are closely correlated with the market portfolio represented by the CRSP Index.
To examine performance consistency, Table 1, Panels B and C report monthly alphas of fund
portfolios by year. Panel B shows alphas for the pooled sample of all funds in the sample. The
funds produce positive and significant excess returns, at the one percent level, in six years, and
negative, significant excess returns in three years. The pattern of significance for alphas, (0, +, -,
+, +, +, +, +, -, -), demonstrates a five-year period of during which the group consistently beat the
CRSP index on a risk-adjusted basis. An examination of the magnitudes of the positive and
5
The 112 funds represent the total number of unique funds that, for at least one year during the test period, were
managed by an individual for at least 10 years. See the appendix for a list of funds satisfying this criterion and their
managers’ length of tenure.
6
Since the control sample in Table 1 consists of funds managed by individuals with nine years tenure or less, we also
compared the performance of funds managed by individuals with at least 10 years tenure to portfolios consisting of funds
with managers having a maximum of eight, seven, six, five, four, three, two, and one year(s) tenure. The marginal alphas
are not materially different. They are respectively, -0.0003, (t= -0.87); -0.0003, (t= -0.93); -0.0004, (t= -1.07); -0.0004, (t=
-1.19); -0.0004, (t= -1.23); -0.0004, (t= -1.22); -0.0005, (t=1.53); -0.0006, (t= -1.72).

6. JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003 229
negative alphas in Panel B suggests that the modest, significant positive alpha for the pooled
returns of the group over the period, reported in Panel A, was made possible by a few good years,
particularly 1987, 1992, and 1993. We note that the period 1991 through 1993 represents the only
years between 1983 and 1995 that more than 50 percent of active managers outperformed the S&P
500.
TABLE 1. SAMPLE FUND PERFORMANCE, 1986-95. FUNDS WITH VARYING MANAGEMENT VS.
FUNDS WITH UNVARYING MANAGEMENT †
Panel A. Pooled monthly performance for sample of 1,042 funds for the period 1986-1995.
Student t statistics in parentheses. (Model 2)
αi βD βM βS βG Adj-R2 F-stat
Prob>F
0.0016 -0.0001 0.9185 -0.1922 -0.2000 0.6195 46,395
(17.20) * ( -0.28) (386.06) * (-57.69) * (-41.45)* <0.000
Panel B. Monthly alphas within annual portfolios for the period 1986-1995 (Model 1)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
N=642 N=725 N=839 N=888 N=945 N=1,021 N=1,094 N=1,120 N=1,114 N=1,110
-0.0005 0.0073 -0.0026 0.0015 0.0029 0.0027 0.0045 0.0068 -0.0028 -0.0062
(-1.13) (14.53) * (-7.21) * (6.07) * (5.51) * (7.47) * (16.43) * (16.51) * (-11.89) * (-16.78) *
Panel C. Marginal monthly excess returns, (βD), by year, from a sample of 112 funds with
unvarying management relative to funds with unvarying management for the period 1986-1995‡
(Model 2)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
N=52 N=48 N=53 N=54 N=54 N=56 N=61 N=72 N=72 N=86
0.0004 0.0005 -0.0010 -0.0006 0.0013 -0.0004 -0.0005 -0.0008 0.0003 -0.0004
(0.29) (0.30) (-0.91) (-0.71) (1.09) (-0.37) (-0.52) (-0.76) (0.35) (-0.49)
Notes: † Unvarying management defined as management that has directed the fund for at least 10 years. ‡ Within a year,
only those managers with at least 10 years experience running the fund prior to January are included. * Significant at the 1
percent level. N = Number of funds in the portfolio each year.
Panel C contains the marginal, monthly risk-adjusted excess return by year for the 112 funds
managed by individuals with at least 10 years experience. To be included in the portfolio for a
given year, the manager must have had 10 years tenure at the beginning of the year. These results
are also obtained from running Model 2, where the dummy variable represents the excess return of
funds with managers having at least 10 years tenure. The pattern of performance for both sets of
funds is virtually identical. In no year is the marginal excess return, βD, different from zero at any
acceptable significance level. The evidence provides no support for the claim that managers with
long-term associations with a fund provide shareholders with greater, or more persistent,
performance than funds that vary their management team over time.

7. 230 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
Superior Performance
Most mutual fund data providers, including Morningstar, report fund alphas as a performance
measure, but without regard to significance. As indicated earlier, only statistically significant
alphas suggest that the performance of a manager may not have been a random occurrence. The
decision not to report the significance of the alpha may have less to do with the perception that the
reader would not understand the statistic and more to do with the value in identifying those funds
and managers capable of generating excess returns.
To determine the annual excess return potential of the best performing funds in our sample,
we form portfolios containing only funds producing positive alphas in each year of the 10 sample
years. Table 2 reports the number and proportion of funds in the sample that generate positive
alphas each year and the excess return and significance of holding a portfolio of these funds each
year. In other words, with perfect foresight regarding each manager’s ability to generate positive
excess returns, what level of excess return could an investor achieve by holding only the funds
producing positive alphas? On average, 51.5 percent of the funds in our sample produced positive
alphas. The monthly alpha of 0.683 percent for this group represents an annual excess, risk-
adjusted return of about 8.5 percent. Investors’ chances of picking a fund producing a positive
alpha ranged from one in five in 1994 to about four in five in 1993.
Table 2, Panels A and B, present the pooled monthly risk-adjusted excess returns, by year, for
the funds producing positive alphas in each year of the test period. The value for “N =” is the
number of funds in the sample producing a positive alpha, and the percentage below it represents
the proportion of the sample that produced positive alphas. Portfolios of these funds are positive
and significant at the 1 percent level in all years. As in the full sample, these funds produce the
highest alphas in 1987 and 1993. Table 2, Panel B, presents the marginal excess returns (βD) of
funds producing positive alphas and managed by individuals with at least 10 years tenure relative
to the control sample of funds managed by individuals with less than 10 years tenure. The results
challenge the notion that managers with extensive experience offer more value in two ways. First,
in no year do the managers producing positive alphas provide a significantly higher excess return.
Second, the proportion of experienced managers producing positive alphas, relative to their peers
(58.1 percent), is not significantly greater than the proportion of the less experienced managers
producing positive alphas, relative to their peers (difference = 6.9 percent, t = 0.55). The
correlation coefficient for the two sets of proportions is 0.985. In other words, a portfolio of funds
managed by individuals with at least 10 years experience could not produce greater excess returns
and, when choosing a manager with this level of experience, the chance of choosing a fund that
would produce positive alphas was no better than for the less experienced group.
The results reveal that, even among the top performers, funds managed by individuals with at
least 10 years tenure offer no greater excess returns, nor greater consistency in performance.
Short-Term Performance Persistence
The tests to this point presume that investors hold an equally weighted portfolio consisting of
all funds in the sample or sub-sample. In this section our test presumes the investor employs a
simple screening technique based on the consistency with which the manager or fund generates
positive excess returns.
Popular and academic literature (Volkman and Wohar 1996; Grinblatt and Titman 1993),
suggest that managers can demonstrate superior performance for short periods. Our test of short-
term performance persistence consists of investing in managers who have produced three
consecutive positive (though not necessarily significant) annual alphas during a base period. We
compare the portfolio alpha for the three-year base period with the portfolio alphas over the

8. JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003 231
subsequent three years. The analysis consists of five separate test periods that blanket the variety
of market conditions present from 1986 through 1995.
TABLE 2. ANNUAL PERFORMANCE OF FUNDS PRODUCING POSITIVE EXCESS RETURNS
Panel A. Pooled monthly alphas of funds producing individual positive alphas for a given year for the period
1986-1995. Percentages of funds posting positive alphas are provided for each year. (Model 1)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
N=236 N=548 N=207 N=487 N=587 N=596 N=838 N=881 N=221 N=308
0.367 0.756 0.247 0.548 0.621 0.584 0.766 0.787 0.200 0.277
0.0065 0.0096 0.0055 0.0051 0.0089 0.0061 0.0069 0.0082 0.0071 0.0044
(6.28) * (15.94) * (5.86) * (14.17) * (17.55) * (13.42) * (25.03) * (16.93) * (8.41) * ( 8.28) *
Panel B. Funds managed by individuals with at least ten years tenure.† Marginal monthly alphas (βD) of
funds producing individual positive alphas for a given year for the period 1986-1995 relative to funds
managed by individuals with less than ten years tenure. Percentages of funds posting positive alphas are
provided for each year. (Model 2)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
N=21 N=42 N=14 N=28 N=37 N=41 N=52 N=64 N=17 N=30
0.404 0.875 0.264 0.518 0.685 0.732 0.852 0.890 0.236 0.349
-0.0006 -0.0005 -0.0024 -0.0004 0.0002 -0.0019 -0.0013 -0.0013 0.0016 -0.0008
(-0.20) (-0.25) (-0.83) (-0.29) ( 0.21) (-1.43) (-1.45) (-1.15) ( 0.64) ( -0.80)
Notes: † Within a year, only those managers with at least 10 years experience running the fund prior to January of the year
are included. * Significant at the 1 percent level.
Table 3 presents the results from this “hot hands” test for all funds in the sample. It reports,
for example, that 87 funds in the sample generated positive alphas in each of the three years of the
base period consisting of 1986, 1987, and 1988. The portfolio monthly alpha for the base period
was 0.45 percent, or 5.5 percent compounded annually, which is significant at the 1 percent level.
The extraordinary performance extended into the fourth year, when the funds produced, as a
group, a monthly alpha of 0.40 percent, or 4.9 percent, also significant at the 1 percent level. This
level of performance did not extend into the second and third years following the base period,
however, and the monthly alpha for the group over the subsequent three years is only 0.01 percent,
which is not statistically significant. The results show that using the strategy of investing in funds
producing three consecutive positive alphas during the period 1986-88 would have produced
significant excess returns in only the first year.
The results in Table 3 indicate that, while this strategy would have worked in the first year
following the base period in four of five base periods, subsequent performance, including three-
year portfolio returns, is inconsistent. In one case, 1990-92, the three-year performance following
the base period produced significant negative excess risk-adjusted returns.

9. 232 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
TABLE 3. PERFORMANCE PERSISTENCE OF FUNDS PRODUCING POSITIVE EXCESS RETURNS
FOR THE PERIOD 1986-95 (MODEL 1)
Number of
funds with Portfolio
positive alpha Portfolio alphas in subsequent years c Portfolio
alphas in (t-stat) (t- stat) alpha (t-stat)
each year during for three years
Three-year of base base following
a
base period period period b 1989 1990 1991 1992 1993 1994 1995 base period d
1986-88 87 0.0045 0.0040 -0.0009 0.0009 0.0001
(3.95) * (3.49) * ( -0.33) (0.46) (0.13)
1987-89 99 0.0059 -0.0002 0.0012 0.0040 -0.0009
(6.71) * ( -0.07) (0.68) ( 3.25) * (-1.25)
1988-90 76 0.0037 0.0054 0.0098 0.0087 0.0064
* * * *
(7.89) (4.75) (11.40) (7.34) (11.86) *
1989-91 235 0.0047 0.0071 0.0067 -0.0043 0.0030
(17.96) * (14.85) * (11.23) * (-10.21) * (11.06) *
1990-92 357 0.0051 0.0067 -0.0038 -0.0036 -0.0006
(24.47) * (13.88) * (-10.69) * (-6.62) * (-3.22) *
Notes: a Base period contains funds producing positive, risk-adjusted excess returns (alpha) from Model 1 during every
year of a three-year base period. Model 1 is used to generate fund alphas during each year of the base period. b For
example, the 87 funds with positive alphas during each year of the three-year base period 1986-88 generated significant
monthly excess risk-adjusted returns of 0.40 percent in 1989. c For example, the 87 funds with positive alphas during each
year of the three-year base period 1986-88 did not generate monthly risk-adjusted excess returns during the period 1989-
91. * Significant at 1 percent level. * * Significant at 5 percent level.
Our test results provide evidence supporting a short-term hot hands effect, but our major
concern is whether managers with at least 10 years tenure provide greater value or are more
consistent than their less experienced peers. Table 4 results are structured in the same fashion as
those in Table 3, except the values report only the marginal alphas from the dummy variable in
Model 2 where βD, i is one if the fund is managed by an individual with at least 10 years tenure,
zero otherwise.
Table 4 reports the marginal difference between the returns of managers with more than ten
years tenure and those with less experience. The results in Table 4 do not support the notion that
managers with lengthy tenure provide greater excess risk-adjusted returns or greater consistency
than their less experienced peers. Using the 1986-88 base period as an example, nine funds from
the group with 10 years tenure produced positive alphas for the base period. Their subsequent
performance, for individual years and for the three-year period following 1988, indicate these
managers excelled beyond their less experienced peers, producing a three-year monthly alpha of
0.65 percent, or 8.1 percent annually, significant at the 1 percent level; yet the period 1989-91
appears to be an anomaly. Performance in the subsequent test periods suggests that, in general,
these experienced managers do not provide greater excess returns, or greater consistency, than
their less experienced peers.

10. JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003 233
TABLE 4. MARGINAL PERFORMANCE OF FUNDS MANAGED BY INDIVIDUALS WITH AT LEAST 10
YEARS TENURE RELATIVE TO PERFORMANCE OF MANAGERS WITH LESS EXPERIENCE (MODEL 2)
Number of Marginal
funds with Marginal Marginal portfolio performance in subsequent years c portfolio
positive portfolio (t-stat) performance
alphas performance (t-stat) for
in each year (t-stat) three years
Three-year of base during base following
base period period a period b 1989 † 1990 1991 1992 1993 1994 1995 base period d
1986-88 9 -0.0009 0.0056 0.0039 0.0100 0.0065
(-0.28) (1.73) * * * ( 0.82) (2.13) * * (2.60) *
1987-89 8 0.0013 0.0035 0.0108 -0.0006 0.0046
( 0.43) (0.73) (2.25) * * (-0.18) (1.79) * * *
1988-90 12 -0.0015 0.0023 -0.0018 -0.0008 -0.0001
(-0.91) (0.73) (-0.74) (-0.30) (-0.06)
1989-91 11 0.0008 -0.0015 0.0007 -0.0003 -0.0005
( 0.68) (-0.89) ( 0.40) (-0.21) (-0.52)
1990-92 18 -0.0010 0.0013 -0.0002 0.0005 0.0007
(-1.07) ( 0.91) (-0.14) (0.36) ( 0.90)
Notes: a Base period consists of funds producing positive, nonthly, risk-adjusted excess returns (alpha) from Model 1 in
every year of a three-year base period. Model 1 is used to generate alphas for each year of the three-year base period. b The
dummy variable from Model 2 measures the marginal post-base period performance of managers with at least 10 years at a
fund relative to the performance of funds managed by individuals with less than 10 years tenure. c For example, the nine
funds producing positive alphas during each year of the three-year base period 1986-88 generated significant monthly
excess, risk-adjusted returns 0.56 percentage points higher than funds managed by individuals with less than 10 years
tenure. d For example, the nine funds producing positive alphas during each year of the three-year base period 1986-88
generated significant monthly excess, risk-adjusted returns 0.65 percentage points higher than funds managed by
individuals with less than 10 years tenure. † Within a year, only those managers with at least 10 years experience running
the fund prior to January are included. * * Significant at 5 percent level. * * * Significant at 10 percent level.
Summary and Conclusions
If the longevity of a fund manager is related to ability to provide superior performance, the
manager’s tenure at a fund should be a factor in explaining the size and persistence of fund
returns. Using the methodology which controls for returns on the market portfolio, market
capitalization, and a value component, we show that a portfolio of 1,042 mutual funds generates
positive, significant risk-adjusted annual excess returns of about 1.81 percent between 1986 and
1995, a period which included the bull market of 1986 and 1987, the crash of 1987, a recession,
and the initial stages of the bull market of the late 1990s. Though mutual funds and financial
advisors generally tout the value of managers with lengthy experience at a fund, the 112 funds
employing 115 managers with at least 10 years tenure at a fund within a given year were unable to
provide greater, or more persistent, positive, excess risk-adjusted returns than a control group
containing funds with active managers having less experience.
While portfolios containing mutual funds from each group generate similar positive, excess
returns over the test period, persistent, positive excess returns are elusive for even the best
managers. Our tests reveal that the chances of selecting a fund that will produce a positive
significant alpha in a given year are, on average for the period, about 50 percent, and the chances
of selecting a fund that will produce a positive alpha from the sample of managers with at least 10
years tenure is not significantly different.

11. 234 JOURNAL OF ECONOMICS AND FINANCE • Volume 27 • Number 2 • Summer 2003
Results from short-term performance tests yield little evidence that extraordinary performance
can be maintained by either group of funds. Instead, excess returns tend to be concentrated in a
few crucial years. Without regard to manager tenure, funds generating significant excess returns
over a three-year base period are not likely to produce positive and significant risk-adjusted excess
returns in the subsequent three-year period. The results for a three-year base period and post
period are not consistent with short-term performance persistence evidence by Goetzmann and
Ibbotson (1994) or Volkman and Wohar (1996). However, our tests reveal that using a three-year
base period to predict performance in the subsequent year is valuable, though managers with at
least 10 years tenure perform no better than their less experienced colleagues, in general.
The results from this study suggest that, while the excess returns of funds operating during the
period between 1985 and 1995 produce positive excess returns, the risk-adjusted excess returns of
funds managed by individuals with at least 10 years tenure are not different from those of funds
with varying management. Neither group demonstrates a record of consistency. Consequently, we
find no compelling reason to believe that manager tenure is a proxy for expertise that produces
superior or consistent performance.
References
Brown, S. J., and W. N. Goetzmann. 1995. “Performance Persistence.” Journal of Finance 50:
679-698.
Carhart, M. 1997. “On Persistence in Mutual Fund Performance.” Journal of Finance 52: 57-86.
Elton, J., M. Gruber, and C. Blake. 1996a. “Survivorship Bias and Mutual Fund Performance.”
The Review of Financial Studies 9: 1097-1120.
Elton, J., M. Gruber, and C. Blake. 1996b. “The Persistence of Risk-Adjusted Mutual Fund
Performance.” Journal of Business 69: 133-157.
Elton J., M. Gruber, A. Das, and M. Hlavka. 1993. “Efficiency with Costly Information: A
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Fama, E., and K. French. 1993. “Common Risk Factors in the Returns on Stocks and Bonds.” The
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Grinblatt, M., and S. Titman. 1993. “Performance Measurement without Benchmarks: An
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Goetzmann, W., and R.G. Ibbotson. 1994. “Do Winners Repeat?” Journal of Portfolio
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Gruber, M. 1996. “Another Puzzle: The Growth in Actively Managed Mutual Funds.” Journal of
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Appendix
The construction of both the size and book-to-market equity portfolios follows the
methodology of Fama and French (1993). To construct the difference in return between an equally
weighted small-capitalization portfolio and a large-capitalization portfolio (Rs - Rl) for every
month of year s, we first construct five size-based portfolios. The five portfolios are constructed
for year s based on market equity (ME = stock price time shares outstanding) from June of year s
using CRSP data.7 Quintiles are constructed based on the ME of all NYSE and AMEX listed
firms. Returns are then computed for all NYSE, AMEX, and NASDAQ firms in the largest and
smallest quintile from July of year s to June of year s + 1. If a firm is delisted during year s, then
the month that firm is delisted, the return is set to zero and the next month the sample size is
reduced by one.
To construct the difference in returns between a high-growth portfolio and a value portfolio in
year s by month, (Rg - Rv), we construct five portfolios based on the book-equity to market-equity
(BE/ME) ratio.8 To ensure that the accounting variable (book equity) is known before the returns it
is used to explain, BE is calculated from COMPUSTAT for fiscal year no later then December of
year s -1. Market equity is calculated based on CRSP data from June of year s. Then, based on the
ratio of BE/ME, we calculate returns from July of year s to June of year s + 1 for the largest and
smallest quintile. Therefore, to be included in the sample, a firm must have CRSP stock prices and
shares outstanding for June of year s and COMPUSTAT shareholder equity (BE) for fiscal year
ending in year s - 1. If a firm is delisted during year s, then the return for the month delisted of that
firm is set to zero and the next month the sample size is reduced by one.
7
Search CRSP data starting at June 30 for year s. If there is no information for share price or number of shares
outstanding for the entire month of June, then the stock is dropped from the sample.
8
This value is book equity (COMPUSTAT item # 60) less deferred taxes (item #74). Market equity is defined as
share price, end of June, year s, times shares outstanding.

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