Investments, tenth edition

 Table 4.4 

 Consistency of 

investment results 

Successive Period Performance

Initial Period Performance

Top Half

Bottom Half

A. Malkiel study, 1970s

Top half

65.1%

34.9%

Bottom half

35.5

64.5

B. Malkiel study, 1980s

Top half

51.7

48.3

Bottom half

47.5

52.5

 Source: Burton G. Malkiel, “Returns from Investing in Equity Mutual Funds 1971–1991,” 

 Journal of Finance  50 (June 1995), pp. 549–72. Used with permission of John Wiley 

and Sons, via Copyright Clearance Center. 

6

 Burton G. Malkiel, “Returns from Investing in Equity Mutual Funds 1971–1991,”  Journal of Finance  50 (June 

1995), pp. 549–72. 

7

 Another possibility is that performance consistency is due to variation in fee structure across funds. We return to 

this possibility in Chapter 11. 

8

 See for example, Mark M. Carhart, “On Persistence in Mutual Fund Performance,”  Journal of Finance   52 

(1997), 57–82. Carhart’s study also addresses survivorship bias, the tendency for better-performing funds to stay 

in business and thus remain in the sample. We return to his study in Chapter 11.

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110 

P A R T   I

 Introduction

 Suppose you observe the investment performance of 400 portfolio managers and rank them by invest-

ment returns during the year. Twenty percent of all managers are truly skilled, and therefore always fall 

in the top half, but the others fall in the top half purely because of good luck. What fraction of this year’s 

top-half managers would you expect to be top-half performers next year? 

 CONCEPT CHECK 

4.4 

 The first place to find information on a mutual fund is in its prospectus. The Securities and 

Exchange Commission requires that the prospectus describe the fund’s investment objec-

tives and policies in a concise “Statement of Investment Objectives” as well as in lengthy 

discussions of investment policies and risks. The fund’s investment adviser and its port-

folio manager are also described. The prospectus also presents the costs associated with 

purchasing shares in the fund in a fee table. Sales charges such as front-end and back-end 

loads as well as annual operating expenses such as management fees and 12b-1 fees are 

detailed in the fee table. 

 Funds provide information about themselves in two other sources. The Statement of 

Additional Information (SAI), also known as Part B of the prospectus, includes a list of the 

securities in the portfolio at the end of the fiscal year, audited financial statements, a list 

of the directors and officers of the fund—as well as their personal investments in the fund, 

and data on brokerage commissions paid by the fund. However, unlike the fund prospec-

tus, investors do not receive the SAI unless they specifically request it; one industry joke 

is that SAI stands for “something always ignored.” The fund’s annual report also includes 

portfolio composition and financial statements, as well as a discussion of the factors that 

influenced fund performance over the last reporting period. 

 With thousands of funds to choose from, it can be difficult to find and select the 

fund that is best suited for a particular need. Several publications now offer “encyclope-

dias” of mutual fund information to help in the search process. One prominent source is 

Morningstar’s  Mutual Fund Sourcebook.  Morningstar’s Web site,   www.morningstar.com,   

is another excellent source of information, as is Yahoo!’s site,   finance.yahoo.com/funds.   

The Investment Company Institute (