Correspondence: Mike Dempsey, Department of Accounting and Finance, Faculty of Business and Economics, PO Box 197, Monash University, VIC 3145, Australia

¹holds a BSc from the University of York (UK), an MSc in Mathematics from Kings College, London and a PhD in Astrophysics (University of Wales, UK). His practitioner career has been in reservoir engineering management on a world stage. He has been an academic in the United Kingdom and Australia since 1992 and is currently Associate Professor at the Department of Accounting and Finance, Monash University.

Received 24 November 2008; Revised 24 November 2008.

Abstract

This paper examines the persistence of return performance for Australian managed funds. Our first finding is that return performance is unstable, with a strong tendency for top-performing funds to become bottom-performing funds, and vice versa. Our second finding is that the classical measures of fund performance (Sharpe and Treynor indices) provide a more stable measure of performance, but, significantly, that such stability results from the inherent insensitivity of the performance measures to either improvements or deteriorations in a fund's return performance. We thereby are led to question the insightfulness of these standard performance indices. In seeking to clarify these issues, we apply both a Spearman rank correlation and an innovative Bayesian approach in rating Australian funds over the period between 1998 and 2004.