Young Funds Perform Better…for a While

Newer managed funds tend to offer greater returns than their older, more established counterparts, according to Professor Lubos Pastor, with Robert F. Stambaugh and Lucian A. Taylor of Wharton. It’s a finding that media outlets have seized on. “Why New Mutual Funds are Better” was the Wall Street Journal’s headline.

But before you’re taken in by the promise of youth, it’s important to note the details. The research suggests that youth has promise, but it also suggests that youth fades quickly in the marketplace, as elsewhere.

According to Pastor, Stambaugh, and Taylor’s research, funds that are three years old or less outperform those that are at least a decade old by 1% per year, on average. Funds aged between three and six years also outperform the oldest funds. A fund’s ability to beat its benchmark tends to deteriorate as the fund gets older, in part because of the continued arrival of new competitors.

“Learning on the job seems to alleviate the negative impact of growing industry size on performance, but it does not eliminate it,” says Pastor. “Fund managers pick up new skills on the job, but they don’t improve fast enough to compete successfully with the new entrants in the industry.”