Does Mutual Fund Performance-Chasing Deserve its Bad Reputation?

A recent CFA Institute article discusses mutual fund performance-chasing which it says has drawn criticism.

To evaluate how performance-chasing is faring in the U.S., the CFA Institute replicated momentum investing strategies using data spanning from 2000 to 2018, creating long-only portfolios made up of the top and bottom 10% of funds. The article reports: “We found the best-performing funds beat an equal-weight index of all equity mutual funds as well as the worst-performing funds by a handsome margin. Put another way: Performance chasing works.”

The article notes, however, that the results are “more theoretical than practical” since the calculations did not include transaction costs, “which are likely in excess of 1%.” It also notes that the results look less attractive if a one-year minimum holding period is imposed. For most mutual fund allocators, it points out, three years is considered the “bare minimum” for evaluating performance—but when CFA selected funds based on their three-year performance and then held them for one and three years, respectively, “the results suggest that mutual fund chasing deserves its bad reputation:”