Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 211-212

Mark Carhart, of the University of Southern California, is another respected scholar who tackled the issue of persistence in fund performance. He evaluated 1,892 diversified equity funds over 16,109 fund years (amazing!) from 1962 to 1993. First, he found that "common factors in stock returns [value vs. growth, large cap vs. small cap, high beta vs. low beta] and investment expenses almost completely explain persistence in equity fund returns." Properly adjusting for the customary failure to consider the effect of the subaverage returns of funds that have gone out of existence, Carhart confirmed Professor Burton Malkiel's conclusion, described in Chapter 5, that survivor bias has enhanced past annual returns reported for funds over the 1982-1991 decade by about 1.4 percent per year. Dr. Malkiel also found some limited evidence of persistence during the 1970s, but none during the 1980s.

Looking at past one-year returns relative to those of the subsequent year, Carhart concluded, among other things, that relatively few funds stay in their initial decile ranking, although funds in the top and bottom deciles maintain their rankings more frequently than the 10 percent that mere chance would suggest. The 17 percent of funds repeating in decile one seems less than compelling. The 46 percent of funds repeating in decile ten, on the other hand, is quite imposing, a performance that seems largely explained by the fact that many low-decile funds tend to be trapped there by their high costs. In his conclusion, Carhart warns: "While the popular press will no doubt continue to glamorize the best-performing mutual fund managers, the mundane explanations of strategy and investment cost account for almost all of the important predictability of mutual fund returns." [Italics added] Translation: Relying on past records to select funds that will provide superior performance in the future is a challenging task.