Starting on the Wrong Foot : Seasonality in Mutual Fund Performance

Brown, Stephen J. and Sotes-Paladino, Juan and Wang, Jiaguo and Yao, Yaqiong (2017) Starting on the Wrong Foot : Seasonality in Mutual Fund Performance. Journal of Banking and Finance, 82. pp. 133-150. ISSN 0378-4266

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Abstract

We document a systematic seasonal component in the aggregate underperformance of active mutual funds. At the aggregate level, active funds underperform the market and other passive benchmarks only in the first month of a quarter. This intra-quarter performance seasonality holds across fund sizes and investment styles. The pattern is consistent with short-term stock return reversal effects along with aggregate window-dressing and, to a lesser extent, NAV-inflation practices around quarter-ends. We find marginal or no evidence of microstructure biases, fund investor flows, or cash distributions as sources of this seasonality. Our findings highlight new features of the active management underperformance puzzle.