Abstract:
Using daily return data from 448 actively managed mutual funds over a recent 9-
year period, we look for persistence, over two consecutive quarters, in the ability of
funds to select individual stocks and time the market. That is, we decompose overall
fund performance into excess returns resulting from stock selection and timing abilities
and we separately test for persistence in each ability. We ¯nd persistence in the ability
to time the market only among well performing funds and in the ability to select stocks
only among the very best and worst performers. The existing literature patterns appear
only when funds are ranked by their overall performance, which includes stock selection,
market timing and fees. With respect to overall performance, there is persistence among
most poorly performing and only the top well performing funds. Furthermore, the
pro¯tability of a winner-picking strategy depends on the rebalancing frequency and
potentially the size of the investment. Small investors cannot pro¯t, whereas large
investors can take advantage of the class A share fee structure and realize positive
abnormal returns by annually rebalancing their portfolios.