Do Investors Chase Performance or Skill? Evidence from Mutual Fund Flows
56 Pages Posted: 4 Feb 2017
Date Written: November 2016
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
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