On the Implications of Mutual Fund Managers’ Reliance on Categories
60 Pages Posted: 19 Jul 2013 Last revised: 8 Aug 2016
Date Written: August 1, 2016
This study shows that mutual fund managers vary in their reliance on category-level information, relative to firm-specific information about assets. Moreover, fund performance decreases with managers’ propensity to rely on categories. Fund managers display less skill in picking stocks which are more coarsely categorized, especially when the managers rely more on categories. Fund managers’ reliance on categories increases with the demands on their attention, such as when market uncertainty, valuation uncertainty of assets, and portfolio diversification are high. Taken together, the evidence is consistent with fund managers’ limited attention driving their reliance on coarse categories and detrimentally affecting investment outcomes.
Keywords: mutual funds, portfolio management, categorization, limited attention, behavioral finance
JEL Classification: G02, G11, G14, G23
Suggested Citation: Suggested Citation