Download or read book Do Investors Chase Performance Or Skill Evidence from Mutual Fund Flows written by Jon A. Fulkerson and published by . This book was released on 2017 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: When evaluating a manager, investors should attempt to separate luck from skill. We find a mutual fund manager's demonstrated skill better predicts future performance than past fund performance. Despite that fact, investors tend to buy the funds with the best past performance, not the funds whose managers have demonstrated the most skill. Further, investors react strongly to fund performance even when it contains no information about manager skill. By failing to separate luck from skill, investors make inferior capital allocations.
Download or read book Mutual Fund Flows Performance Persistence and Manager Skill written by Yan Albert Wang and published by . This book was released on 2014 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper adapts the model of Berk and Green (2004) to explain with reasonable success the data on mutual fund returns and flows. Using a Bayesian measure of fund-manager skill that controls for fund flows, I find that posterior estimates of skill vary substantially in the cross section and that perceived differences in ability persist through time. Consistent with the model, investor fund flows respond in a convex manner to posterior updates of manager skill scaled by functions of the expense ratio, and this result is robust after including a convex function of past performance. While cross-sectional variation in posterior skill estimates has predictive power for out-of-sample subsequent fund performance, such predictability is present only in the short run. Beyond one year, high-skilled managers do not consistently out-perform low-skilled managers as skill-chasing fund flows equalize the realized abnormal fund returns across managers. Overall, my empirical evidence is consistent with some managers possessing high ability, investors rationally chasing returns generated by those managers, and lack of long-run persistence in fund returns due to equilibrating fund flows and diseconomies of scale in assets under management. Outside of the model, I show that the cross-sectional distribution of managerial ability is related to fund style and fund-manager compensation in a way that is consistent with matching the managerial productivity to the nature of the underlying portfolio.
Download or read book Which Factors Matter to Investors Evidence from Mutual Fund Flows written by Brad M. Barber and published by . This book was released on 2016 with total page 77 pages. Available in PDF, EPUB and Kindle. Book excerpt: When assessing a fund manager's skill, sophisticated investors will consider all factors (priced and unpriced) that explain cross-sectional variation in fund performance. We investigate which factors investors attend to by analyzing mutual fund flows as a function of recent returns decomposed into alpha and factor-related returns. Surprisingly, investors attend most to market risk (beta) when evaluating funds and treat returns attributable to size, value, momentum, and industry factors as alpha. Using proxies for investor sophistication (wealth, distribution channels, and periods of high investor sentiment), we find that more sophisticated investors use more sophisticated benchmarks when evaluating fund performance.
Download or read book Mutual Fund Performance and Performance Persistence written by Peter Lückoff and published by Springer Science & Business Media. This book was released on 2011-01-13 with total page 604 pages. Available in PDF, EPUB and Kindle. Book excerpt: Peter Lückoff investigates why fund flows and manager changes act as equilibrium mechanisms and drive the performance of both previously outperforming and previously underperforming funds back to average levels.
Download or read book Is Money Really smart written by Russ Wermers and published by . This book was released on 2003 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Investor Learning and Mutual Fund Flows written by Jennifer C. Huang and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the implications of investor learning for the sensitivity of mutual fund flows to past performance. We illustrate theoretically that when some sophisticated investors learn from past fund performance to form their posterior expectations of managerial ability, the flow-performance sensitivity should be weaker for funds with more volatile past performance and longer track records. Moreover, the dampening effects of performance volatility and fund age on the flow-performance sensitivity should be stronger for funds attracting more sophisticated investors. We provide supporting evidence for this investor learning hypothesis using mutual fund flows and compare the relative level of sophistication among investors in load versus no-load funds, institutional versus retails funds, and star versus non-star funds.
Download or read book Reference Dependent Return Chasing written by Fabian Brunner and published by . This book was released on 2019 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: How mutual fund investors chase performance (alpha) with their money is strongly mediated by the nominal price gain or loss that they hold the fund at. For high alpha funds, the investment response to alpha is increased by as much as 50% if the fund is held at a gain as opposed to a loss considering the average dollar invested. The convexity in the relation of fund flows and performance disappears for funds held at a loss. This distinct interaction of alpha and gains operates through buy but not sell decisions. The empirical evidence is consistent with the creation of new investors based on social transmission and information search as mechanism.
Download or read book What Drives the Smart Money Effect Evidence from Investors Money Flow to Mutual Fund Classes written by George J. Jiang and published by . This book was released on 2016 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: The literature proposes two competing explanations -- the “smart-money” and “persistent-flow” hypotheses -- for the positive relation between mutual fund flow and future fund performance. We examine the flow-performance relation for different classes of U.S. domestic equity mutual funds. Our results show a stronger positive relation for the retail class than for the institutional class. More importantly, the significant relation for the retail class is mainly driven by funds with net outflow. This evidence is inconsistent with the smart-money hypothesis. We further show that retail funds exhibit greater persistence than institutional funds in net outflow. Once we control for expected fund flows, the flow-performance relation is no longer significant. We also perform robustness checks based on international funds and bond funds. The findings are supportive of the persistent-flow explanation.
Download or read book Investors Do Respond to Poor Mutual Fund Performance written by George D. Cashman and published by . This book was released on 2007 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: The non-linear relation between mutual fund performance and subsequent net flows is well documented in the mutual fund literature. The extant literature generally ascribes the absence of net outflows in the face of poor performance to inactivity by existing fund investors (i.e., they do not to exit). We examine monthly gross flows and find that existing investors do, in fact, respond to poor mutual fund performance. Specifically, existing investors punish poorly performing funds by increasing outflows. We also find that existing and potential investors punish poorly performing funds by reducing inflows to those funds. Finally, we document that current investors respond to poor performance with the same intensity as they do to good performance.
Download or read book Is Money Smart an Investigation of Mutual Fund Investor s Fund Selection Ability written by Lu Zheng and published by . This book was released on 2009 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: With $2.1 trillion assets invested in mutual funds, investors spend enormous time and effort on selecting funds. Do investors in aggregate display fund selection ability? Gruber (1996) finds evidence to support selection ability among active mutual fund investors. Using a large sample of equity funds, my paper closely examines this Smart Money effect to determine its economic significance, and the potential reasons why it exists. I evaluate the performance of trading strategies based on fund flows using risk-adjusted returns as well as a performance measure conditioned upon changing economic conditions. The performance measures clearly indicate that investors purchasing and selling decisions are able to predict funds future performance. However, the trading strategies suggest that it is difficult to make significant excess profits by following the herd. Thus there is some evidence that informed investors are able to outperform the average fund consistently. There is marginal evidence that investors can beat the market.What is the source of the Smart Money effect? An analysis using the Ferson and Schadt (1995) conditioning methods indicates that it is not due to responses to macro economic information, nor due to predictable style effects, but likely due to manager-specific information. This lends support to the regulatory policy of requiring broad disclosure of fund information, and suggests that investors, on average, act intelligently in making their share purchase decisions.
Download or read book Fund Flows and Performance a Study of Canadian Equity Funds written by Rajeeva Sinha and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the behavior of mutual fund investors with a specific focus on fund flows - performance relationship. Using a comprehensive survivorship bias free sample of Canadian open-end equity mutual funds and panel data analysis we find evidence of a rational response of fund flows to upside and downside performance changes. Unlike the findings on US funds and investors, we find that investors neither chase winners nor hang on to losing funds. While investors do allocate funds based on past performance the allocations do not disproportionately in favor star funds. Poor performers experience significant fund withdrawals. Combined with the evidence on a positive association of returns variability with fund flows this fund flow performance relationship shows that the fund incentive structure is not biased towards greater risk taking by fund managers. The size of the fund family and previous fund allocations are also significant in influencing decisions on future fund allocations. We also show lack of short and longterm performance persistence. Inspite of the evidence on a rational response the returns realized by investors are lower than the returns reported by mutual funds suggesting poor ability to time the market.
Download or read book Su bios no Paran written by and published by . This book was released on 1971 with total page 115 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Mutual Fund Flows and Performance in Rational Markets written by Richard C. Green and published by . This book was released on 2004 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a simple rational model of active portfolio management that provides a natural benchmark against which to evaluate observed relationship between returns and fund flows. We show that many effects widely regarded as anomalous are consistent with this simple explanation. In the model, investments with active managers do not outperform passive benchmarks because of the competitive market for capital provision, combined with decreasing returns to scale in active portfolio management. Consequently, past performance cannot be used to predict future returns, or to infer the average skill level of active managers. The lack of persistence in active manager returns does not imply that differential ability across managers is nonexistent or unrewarded, that gathering information about performance is socially wasteful, or that chasing performance is pointless. A strong relationship between past performance and the ow of funds exists in our model, indeed this is the market mechanism that ensures that no predictability in performance exists. Calibrating the model to the fund flows and survivorship rates, we find these features of the data are consistent with the vast majority (80%) of active managers having at least enough skill to make back their fees.
Download or read book Returns Chasing Behavior Mutual Funds and Beta s Death written by Jason J. Karceski and published by . This book was released on 2000 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: I develop an agency model where returns-chasing behavior by mutual fund investors causes beta not to be priced to the degree predicted by the standard CAPM. Mutual fund investors chase returns through time, precipitating unusually large aggregate cash inflows into mutual funds just after dramatic market runups. Mutual fund investors also chase returns cross-sectionally across funds. Each period, mutual funds compete in tournaments where the highest-performing funds capture the largest fraction of the aggregate inflows into the mutual fund sector. The interaction between these two flow-performance relationships induces an asymmetry in payoffs to mutual funds such that equity fund managers care most about outperforming peers during bull markets. Since high-beta stocks tend to outperform low-beta stocks in up markets, active fund managers tilt their portfolios toward high-beta stocks, reducing the expected return to these securities in equilibrium. Thus, the presence of actively-managed mutual funds causes beta risk to be priced to a lesser degree than otherwise. Interestingly, the literature suggests that beta died in the early 1980s, coinciding with the spectacular growth of the mutual fund industry in the U.S. To support the model's time-series flow-performance assumption, I show empirically that market returns have a large economic impact on subsequent aggregate mutual fund flows. In addition, data on mutual fund holdings support the model's prediction that the aggregate stock portfolio held by equity mutual funds is over-weighted in high-beta stocks relative to the overall market.
Download or read book Non Fundamental Demand and Style Returns written by Itzhak Ben-David and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We present causal evidence that non-fundamental correlated demand exerts a first-order impact on style returns. Mutual fund investors chase fund performance via Morningstar ratings, regardless of the rating methodology. Until June 2002, ratings depended on fund returns without any style adjustment, and thus mutual funds with the same investment style had highly correlated ratings. This methodology led rating chasing investors to direct capital into winning styles, exacerbating return chasing behavior. Capital flows exerted non-fundamental price pressure on the underlying stocks, creating style-momentum that reverted over time. In June 2002, Morningstar reformed its rating methodology so that ratings became equalized across styles. The reform demonstrates the causal impact of rating chasing: once the reform was implemented, style-level price pressures via the mutual fund channel immediately became muted. Furthermore, the dispersion in style performance declined sharply, and style momentum and reversal disappeared. We estimate that Morningstar rating chasing explains a substantial part of the size and value factors' time-series variation.
Download or read book Does Trading by ETF and Mutual Fund Investors Hurt Performance Evidence from Time and Dollar Weighted Returns written by Ananth Madhavan and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the “return gap” between dollar-weighted returns that account for intermediate investor flows (internal rate of return) and buy-and-hold returns that funds typically report. Our sample constitutes all US-domiciled open-end mutual funds and exchange-traded funds (ETFs), and covers both fixed income and equity funds, as well as active and index styles of management. We find that return chasing behavior explains the cross-sectional pattern of the return gap. The high turnover of liquid ETFs does not lead to sub-par returns for investors in these funds.
Download or read book The Relation Between Past Flows and Future Performance written by Martin Rohleder and published by . This book was released on 2018 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the mutual fund literature, it is an established fact that investors “chase past performance”. However, the opposite impact of flows on performance is widely discussed. Mainly, liquidity costs are held responsible for short-term erosion of performance, while high inflows enhance performance over longer horizons. I investigate this relation for various groups of equity, bond, and money market funds and find significant outperformance in high inflow funds over several months, especially for specific bond fund groups. In addition, I test whether this information can be exploited using simple investment strategies but find that the abnormal returns are too low to offset associated costs.
