We explain the lack of long-term performance persistence by actively managed U.S. equitymutual funds in terms of two equilibrating mechanisms: fund flows and manager changes. Wefind that these mechanisms acting together affect the future performance of past outperforming(winner) funds and past underperforming (loser) funds. Fund flows in isolation have a significanteffect on performance, whereas manager changes in isolation have only a limited effect. Acombination of both fund flows and manager changes has a substantial impact on future fundperformance. If neither of these equilibrating mechanisms is operating, winner funds continue to significantly outperform loser funds by 4.08 percentage points per annum. However, the difference between winner and loser funds declines to almost zero if the two mechanisms are acting together. We also document that managers of winner funds increase risk, while managers of loser funds reduce risk, although losers who are fired took more risk than losers who keep theirjobs
