Mutual Funds Apart from the Crowd

Abstract

We construct measures of mutual fund uniqueness using cluster analysis of fund returns. We find that fund uniqueness persists over time, and is higher for more actively managed funds. More unique funds charge higher fees, but they do not deliver better net-of-fee performance. Fund uniqueness reduces the sensitivity of fund flows to past performance and increases performance persistence, especially when funds perform poorly. Non-unique funds exhibit neither convexity in the flow-performance relation nor performance persistence. Our results suggest that unique funds are better able to retain investors after poor performance, which may in turn increase the persistence of poor performance.

Keywords: Mutual fund, Fund flow, fund performance, cluster analysis

JEL Classification: G23, G34