Whose Money is Smarter? Evidence from Investors’ Money Flows to Mutual Funds and Fund Classes

Abstract

Existing literature documents a “smart money” effect in that investors have selection ability of mutual funds. Nevertheless, there remains a debate on whether such effect is simply the result of stock return momentum. Using monthly fund flows during the period of 1993 to 2010, we show that the smart money effect for institutional funds is explained by stock return momentum, and investors of these funds exploit momentum effect in stock returns. On the other hand, the smart money effect for retail funds goes beyond the momentum effect in stock returns. However, there is no evidence that retails investors have the ability identifying funds with momentum style. Moreover, for retail funds, the smart money effect varies across different fund classes and is mainly driven by investors of no-load funds.

Keywords: “Smart money” effect, Fund flows, Stock return momentum, Institutional funds, Retail funds, Fund classes