Performance and characteristics of mutual fund starts

Abstract

We study the performance and portfolio characteristics of 828 newly launched US equity mutual funds over the period 1991-2005. These fund starts initially earn, on average, higher excess returns and higher abnormal returns. Their risk-adjusted performance is also superior to existing funds. Furthermore, we provide evidence for short-term persistence among top-performing fund starts, however, a substantial fraction of funds drop from the top to the bottom decile over two subsequent periods. Analyzing portfolio characteristics, we find that returns of fund starts exhibit higher ratios of unsystematic to total risk. Portfolios of new funds are typically also less diversified in terms of number of stocks and industry concentration and are invested in smaller and less liquid stocks.