The older the fiddle, the sweeter the tune? A study of the relationship between age and performance of actively managed Nordic equity mutual funds

Abstract: This paper studies the relationship between the performance and the age of equity mutual funds in the Nordics. This is an important question because most institutional investors require funds to have existed for at least two to three years before investing in them. This requirement exists even though the performance of very young funds compared to older funds has not been extensively studied and lacks consensus. It could be that the requirement comes at a cost of worse performance. We show that the prerequisite is unwarranted as the risk-adjusted returns for funds younger than three years do not differ from the risk-adjusted returns of older funds. Nor do we find any evidence for lower standard deviation or higher cumulative returns among funds that are older than three years. Despite the seeming lack of support for requiring funds to be three years or older before investing in them, the criterion still exists. Thus, we propose that qualitative factors, such as the principal-agent conflict between investors (want high risk-adjusted returns) and fund managers (want to keep their jobs) might have better success in explaining the prevalence of the criterion and that future research should approach the subject from this perspective.