Does Slow and Steady Win the Race? Not Quite

Riepe, Mark W.; Swerbenski, Bill
August 2005
Journal of Financial Planning;Aug2005, Vol. 18 Issue 9, p22
Academic Journal
This article examines the second quartile performance for a mutual fund in the U.S. All domestic equity funds as classified by Morningstar beginning at year-end 1996 were examined. Only diversified funds were used; of these, only distinct share classes were used. A given mutual fund is often available in multiple versions. These versions differ by level of the load charges, amount of ongoing expenses and minimum investment amounts, among other reasons. It turns out that domestic equity funds with consistent second quartile performance are diminishing. The reason why there are two numbers in the Percentile Rank column is that a long-term study like this needs to contend with survivorship bias. The first value in the percentile column acts as if the nonsurviving funds never existed in the first place. The second number assumes the funds existed, and since it is not known exactly what their returns were, assumes their returns would have placed them at the bottom of the five-year performance results. It is established that the hyper-consistent funds that have managed to be second quartile for five straight years just barely turn in top quartile performance on a cumulative basis and that assumes the most aggressive adjustment for survivor bias.


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