Investor Mix and Mutual Fund Performance: A Flow Based Measure of Relative Smartness
42 Pages Posted: 30 Oct 2019
Date Written: September 16, 2019
We study the information content of the mutual-fund investor mix at the fund level. Building on the fund-flow determinant literature, we develop a method to attribute the proportion of fund flow explained by a fund’s fundamental characteristics and past performance as smart and dumb money respectively. The fund-level Smart Dumb Ratio (SDR) positively predicts future cross-sectional fund return. A series of tests shows that SDR captures investor sophistication and positively correlates with other skill measures. Our findings confirm that investor composition of the fund can be a useful source of information to estimate the fund-level smart-money effect.
Keywords: mutual-fund flows, risk factors, non-risk factors, smart-money effect, CAPM
JEL Classification: G11, G12
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