What is a Return Gap?
A return gap is the difference between the return actually provided by a mutual fund and how much that fund would have earned if it had simply held to the holdings that were most recently listed. Return gap information must be disclosed to the public at least twice per year, but nearly 50% of mutual funds report this information on a quarterly basis. A study published in the New York Times in January 2006 found that a mutual fund with a consistent positive return gap is more likely to perform favorably in the future when compared to one with a consistent negative return gap. This study took place over a 20 year period and examined the return gap information of more than 2,500 domestic equity mutual funds. The results of the return gap study were not affected by the number of times the portfolio information was disclosed. During the study, researchers created two hypothetical portfolios based on return gap information. One contained the top 10% funds with the most consistent return gap
