Momentum is the best-known anomaly in equities. It says that past winners (losers) will continue to have strong (weak) returns in the future. But does that anomaly also work in mutual funds? Academic research confirms it and shows it could be a good way to pick the future best performing mutual funds.

Several measures of momentum could be used – 1 year high in fund net asset value, simple momentum, or fund sensitivity to momentum factor (momentum load). All three components contain significant, independent information about future fund performance (and have approximately zero correlation); therefore, all of them could be probably used altogether to obtain even greater performance. However, no such combined strategy has been investigated in source paper; therefore, we present the strongest predictor among three – simple price momentum.

Academic research suggests that it seems unlikely that investors are identifying skilled managers, but rather, they are crudely chasing performance. Equity mutual funds usually differ by the style employed by their managers. Therefore mutual fund investors are in reality picking different management styles, and academic research suggests there is strong momentum effect between equity styles (see „Style Rotation Effect“) and momentum effect in market anomalies (see „Momentum effect in anomalies/trading systems“) therefore it appears that this performance chasing has strong fundamental reasons for functionality.