What Do Mutual Fund Investors Really Care About?

Fisher College of Business Working Paper No. 2019-03-005

Charles A. Dice Center Working Paper No. 2019-5

46 Pages Posted: 14 Mar 2019

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Jiacui Li

Stanford University, Graduate School of Business, Students

Andrea Rossi

University of Arizona - Department of Finance

Yang Song

University of Washington - Michael G. Foster School of Business

Date Written: March 6, 2019

Abstract

Rational investors should account for risk factor exposure when allocating capital to mutual funds. Two recent influential studies use mutual fund flows to test whether investors distinguish between performance driven by managers' skill and systematic risk factors. Both studies found that investors use the Capital Asset Pricing Model (CAPM), and one concluded that the CAPM is the "closest to the true asset pricing model." We re-examine these results and show that, in fact, fund flow data are most consistent with investors relying blindly on fund rankings (specifically, Morningstar ratings) and chasing recent returns. We find no evidence that investors account for any of the common systematic risk factors when allocating capital among mutual funds.

Keywords: Mutual funds, retail investors, fund flows, Morningstar, CAPM

JEL Classification: G11, G12, G41

Suggested Citation

Ben-David, Itzhak and Li, Jiacui and Rossi, Andrea and Song, Yang, What Do Mutual Fund Investors Really Care About? (March 6, 2019). Fisher College of Business Working Paper No. 2019-03-005. Available at SSRN: https://ssrn.com/abstract=3292317

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Jiacui Li

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Andrea Rossi

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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