Mutual Fund Shareholder Letters: Flows, Performance, and Managerial Behavior

Abstract

Fund companies regularly send shareholder letters to their investors. We use textual analysis to investigate whether the writing style of these letters matters for fund flows and whether it predicts fund performance and investment styles. We find that fund investors react to the tone and content of shareholder letters. A negative tone leads to more outflows, while honest communication that explains fund performance in light of current economic conditions, as well as a plain English writing style increase flows. Thus, fund companies can use shareholder letters as a tactical instrument, e.g., to avoid redemptions. A positive outlook is informative of better future performance and of higher idiosyncratic risk taking and more active investment styles.

Keywords: Fund Flows, Textual Analysis, Shareholder Letters, Fund Performance

JEL Classification: G23, G11