The Importance of Family: The Role of Mutual Fund Family Reputation in Investment Decisions
William Christopher Gerken
University of Kentucky - Finance
Laura T. Starks
University of Texas at Austin - Department of Finance
University of Texas at Austin - McCombs School of Busiiness
February 2, 2014
We analyze individuals' mutual fund holdings and trades to examine the effect of mutual fund family reputation on individuals' mutual fund investment decisions. Though our sample investors are purchasing funds through a discount brokerage firm, we find that individuals cluster their investments within particular families. We show investors are significantly more likely to purchase funds from families with which they have previous experience, and this effect is greater if the previously experienced return was positive. Using evidence from fund redemptions, we also show that individuals' beliefs about funds belonging to more reputable families appear to change slowly. Finally, we document that investors’ portfolios have higher returns (both raw and risk-adjusted) after family purchases even after considering the increased correlation of funds within the same family complex. Our results are robust to alternative explanations such as inertia, loyalty, style preference, or heterogeneous search costs.
Number of Pages in PDF File: 49
Keywords: individual investor portfolio choice, mutual fund families, reputation
JEL Classification: L01, D83, G11, D14working papers series
Date posted: March 15, 2012 ; Last revised: February 3, 2014
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