Performance persistence of mutual funds: The star family impact

The purpose of this study is to investigate the persistence of mutual fund performance in the context of fund families with particular emphasis on the star family impact. Evidence from the literature shows that investors choose funds on the basis of past returns, implying an expectation of persistence in performance. The extant literature largely ignores the role of the family structure in the assessment of performance persistence. However, fund family structure is important because managers can employ an optimal strategy to benefit the whole family and achieve economies of scale. The star family identity has a spill-over effect on member funds and may have an impact on the performance persistence of funds within the family. Star family managers have strong incentives to sustain the stellar performance of the best performing funds at the expense of the worst performing funds. Results from this study show that mutual funds with a star family identity generally do not perform persistently. Neither the top performers in star families nor the top performers in non-star families perform persistently well. There is evidence that star family identity weakens the persistence of fund performance in the bottom decile. The worst performers in the non-star families persistently underperform their counterparts in the star families by 0.07% per month. However, difference in the bottom decile between star families and non-star families cannot be explained by differential investor response to past performance. The top past-year performing funds that belong to a family structure do not repeat stellar performance, but the bottom past-year performing funds do repeat poor performance