Data-conditioning biases, performance, persistence and flows: The case of Canadian equity funds

This study constitutes the first comprehensive examination of Canadian mutual fund performance using a dataset free of all conditioning biases. The goal is to test many of the same hypotheses which have been previously addressed using US data. The sample is carefully constructed so as to avoid not only survivorship bias but also a form of backfilling bias that exists because funds have a timing option as to when to first provide results to information vendors. The deleterious impact of both forms of bias is documented. Not unlike what has been found in the US, on average fund managers net-of-expenses underperform benchmarks, but it also seems clear that their analysis and trading contribute to portfolio performance. I also present evidence that, at least on a short-term basis, success breeds success. Investors seem aware of this since money flows to successful funds. The strategy of chasing returns looks to be a viable one. One useful byproduct of this work is that an independent dataset has allowed for the corroboration of many of the same stylized facts that have been previously observed in the US.