Investor Timing and Fund Distribution Channels

Abstract

This study examines the investment timing performance of equity mutual fund investors and its relationship to the distribution arrangement of the fund. We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds. Investors in all three principal load-carrying retail share classes (A, B, and C) significantly underperform a buy-and-hold strategy. Among all load funds, Class B investors suffer from the poorest cash flow timing, underperforming a buy-and-hold strategy by 2.28% annually, compared with annual underperformance of 0.78% for investors in pure no-load funds. No-load index funds are the only funds found to show no evidence of poor investor timing. We discuss several potential explanations for the poorer timing performance of investors in load funds, such as broker incentives, fund advertising, and investor return-chasing behavior.

Keywords: Mutual fund performance, fund cash flows, investor timing, fund share classes

JEL Classification: G11, G20