Which Factors Matter to Investors? Evidence from Mutual Fund Flows
77 Pages Posted: 14 Mar 2014 Last revised: 16 Jun 2016
Date Written: May 18, 2016
When assessing a fund manager’s skill, sophisticated investors will consider all factors (priced and unpriced) that explain cross-sectional variation in fund performance. We investigate which factors investors attend to by analyzing mutual fund flows as a function of recent returns decomposed into alpha and factor-related returns. Surprisingly, investors attend most to market risk (beta) when evaluating funds and treat returns attributable to size, value, momentum, and industry factors as alpha. Using proxies for investor sophistication (wealth, distribution channels, and periods of high investor sentiment), we find that more sophisticated investors use more sophisticated benchmarks when evaluating fund performance.
Keywords: mutual fund flows, investor behavior
JEL Classification: G11, G12, G20, G23
Suggested Citation: Suggested Citation