Mutual Fund Performance: A Review of the Literature

This paper provides a comprehensive review of the academic literature on mutual fund performance. Drawing on return-based, holdings-based, structural, behavioral, and systemic-risk perspectives, the review synthesizes more than four decades of empirical and theoretical findings. Although the average actively managed mutual fund underperforms passive benchmarks net of fees, a meaningful subset of managers demonstrate persistent stock-selection skill, informational advantages, and value-added creation. Structural constraints—including liquidity frictions, diseconomies of scale, organizational design, and competitive pressures—shape whether skill translates into investor-level returns. Recent advances in performance evaluation, including Active Share, R² selectivity, value-added measures, and time-varying managerial skill frameworks, yield deeper insight into how managers operate within complex market environments. The literature also highlights the systemic implications of mutual fund activity, particularly in the presence of flow-driven trading and fire sales.