The Wisdom of Crowds: Mutual Fund Investors' Aggregate Asset Allocation Decisions

57 Pages Posted: 24 Jan 2011 Last revised: 21 Aug 2013

See all articles by John Chalmers

John Chalmers

University of Oregon

Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis

Blake Phillips

University of Waterloo

Date Written: August 20, 2013

Abstract

We find that the aggregate asset allocation decisions of US mutual fund investors depend on economic conditions. Both anticipated economic downturns and periods of turmoil lead investors to direct flow away from risky equity funds and towards lower-risk money market funds. These patterns are markedly stronger for investors in low cost and low turnover funds relative to investors in high cost and high turnover funds, consistent with sophisticated investors being more sensitive to changing conditions. Benchmarked against a buy-and-hold strategy, these asset allocation strategies reduce risk without degrading the risk-return trade-off. Our evidence suggests that individual investors, often dismissed as noise traders, collectively react to economic signals in a sensible manner when determining asset allocations.

Keywords: mutual funds, mutual fund flow, asset allocation

Suggested Citation

Chalmers, John and Kaul, Aditya and Phillips, Blake, The Wisdom of Crowds: Mutual Fund Investors' Aggregate Asset Allocation Decisions (August 20, 2013). Journal of Banking and Finance, Vol. 37, 2013. Available at SSRN: https://ssrn.com/abstract=1746190 or http://dx.doi.org/10.2139/ssrn.1746190

John Chalmers (Contact Author)

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3337 (Phone)

Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
403-492-5027 (Phone)
403-492-3325 (Fax)

Blake Phillips

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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