Do Investors Chase Performance or Skill? Evidence from Mutual Fund Flows

56 Pages Posted: 4 Feb 2017  

Jon A. Fulkerson

University of Dayton

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: November 2016

Abstract

When evaluating a manager, investors should attempt to separate luck from skill. We find a mutual fund manager’s demonstrated skill better predicts future performance than past fund performance. Despite that fact, investors tend to buy the funds with the best past performance, not the funds whose managers have demonstrated the most skill. Further, investors react strongly to fund performance even when it contains no information about manager skill. By failing to separate luck from skill, investors make inferior capital allocations.

Keywords: Mutual Fund, Luck, Skill, Alpha, Flows

Suggested Citation

Fulkerson, Jon A. and Riley, Timothy B., Do Investors Chase Performance or Skill? Evidence from Mutual Fund Flows (November 2016). Available at SSRN: https://ssrn.com/abstract=2910705 or http://dx.doi.org/10.2139/ssrn.2910705

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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