Mutual Fund Age, Performance, and the Optimal Track Record

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Abstract/Contents

Abstract: This paper investigates the relationship between mutual fund age and performance, and what this might imply about the track record that investors should require when evaluating mutual funds. While this relationship has been explored mostly through the lens of performance persistence, primarily by Berk and Green (2004), the age/performance relationship alone is still relatively unexplored, particularly in regard to new funds. This relationship has significant implications for the decisions of mutual fund investors. If age and performance have a negative correlation, then waiting several years for a mutual fund to establish a track record before investing may be unwise, as the fund’s best performance will already be behind it. In this paper, I utilize data from the CRSP mutual fund database to quantify the age/performance, age/risk, and age/risk-adjusted performance relationships for Morningstar’s listed U.S. equity funds. I conclude that in general, older funds are riskier, but this relationship reverses for very young funds, which exhibit more risk. I also find that older funds have slightly lower risk-adjusted returns, but this relationship again reverses for very young funds. Though both of these relationships are somewhat weak, my results imply that investors may not want to flock to new funds in the hope of outsized riskadjusted returns—requiring a track record does not come at a significant cost and may, in fact, help investors avoid undue risk.

Type of resource	text
Date created	March 2016

Author	Moore, Olivia
Primary advisor	Shoven, John
Primary advisor	Piazzesi, Monika
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	mutual fund performance
Subject	age and performance
Subject	Morningstar funds
Genre	Thesis

Related item	Title 2016 John G. Sobieski Award for Creative Thinking
Location	https://purl.stanford.edu/sc633rm9916

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Preferred Citation: Moore, Olivia. (2016). Mutual Fund Age, Performance, and the Optimal Track Record. Stanford Digital Repository. Available at: https://purl.stanford.edu/sc633rm9916

Stanford University, Department of Economics, Honors Theses

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