This is an extensive summary. In this summary you can find a sentence or two about each graph and figure based on the authors conclusion. I took just what was important to know about the article. Section V is not included.
Title, authors, journals
Title: On Persistence in Mutual Fund Performance
Author: Mark M. Carhart
Research Question + underlying intuition
How can the predictability in mutual fund returns can be explained? What common factors in
stock returns should we look at?
Underlying intuition: The idea of this paper is that common factors in stock returns and
persistent differences in mutual fund expenses and transaction costs explain almost all of the
predictability in mutual fund returns. Furthermore, this paper looks into the momentum
strategy and finds out that individual mutual funds that appear to follow the one-year
momentum strategy earn significantly lower abnormal returns after expenses. Thus, the
authors conclude that transaction costs consume the gains from following a momentum
strategy in stocks. Also, the author demonstrated that expenses have at least a one-for-one
negative impact on fund performance, and that turnover also negatively impacts
performance.
Main methodology
The author estimated performance relative to the CAPM, 3-factor, and 4-factor models as:
,rit – is the return on a portfolio in excess of the one-month T-bill return.
VWRF – is the excess return on the CRSP value-weighted portfolio of all NYSE, Amex,
and Nasdag stocks.
RMRF - is the excess return on a value-weighted aggregate market proxy.
SMB HML and PR1YR - are returns on value-weighted, zero-investment,
factor-mimicking portfolios for size, book-to-market equity, and one-year momentum in stock
returns
Data
- The mutual fund database covers diversified equity funds monthly from January 1962
to December 1993.
- The author obtained data on surviving funds, and for funds that have disappeared
since 1989.
, Table I. Mutual Fund Database Summary Statistics
- Table I reports summary statistics on the mutual fund data.
- The sample includes a total of 1,892 diversified equity funds and 16,109 fund years.
- The sample omits sector funds, international funds, and balanced funds.
- The remaining funds are almost equally divided among aggressive growth, long-term
growth, and growth-and-income categories.
- In an average year, the sample includes 509 funds with average total net assets
(TNA) of $218 million and average expenses of 1.14 percent per year.
- In addition, funds trade 77.3 percent of the value of their assets (Mturn) in an average
year.
- Since reported turnover is the minimum of purchases and sales over average TNA,
the author obtained Mturn by adding to reported turnover one-half of the percentage
change in TNA adjusted for investment returns and mergers.
- Also, over the full sample, 64.5 percent of funds charge load fees, which average
7.33 percent.
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