Carhart (1997) Mutual Fund Performance Persistence Disappears Out of Sample

Carhart (1997) found that U.S. equity mutual funds’ past-year returns positively predict their raw excess return and one-factor alpha over the next year. Based on these results, an investor may believe that she can earn higher returns by buying mutual funds with high past-year returns. We find that significant performance persistence does not exist in the post-Carhart 1994 to 2018 period. Even during the Carhart 1963 to 1993 period, performance persistence weakened in later years. The disappearance of performance persistence is due to lower returns to favorable styles, as well as less favorable style tilts and increased style-adjusted underperformance by past winning funds.