Do Mutual Funds Keep Their Promises?

60 Pages Posted: 24 May 2021 Last revised: 8 Jan 2022

See all articles by Simona Abis

Simona Abis

Columbia University - Columbia Business School, Finance

Anton Lines

Columbia Business School

Date Written: May 12, 2020

Abstract

Mutual fund prospectuses contain a wealth of qualitative information about fund strategies, yet a systematic analysis of this content is missing from the literature. We use machine learning to group together funds with similar strategy descriptions, and ask whether they act in accordance with the text. Despite weak legal recourse for investors, we find that mutual funds largely do keep their promises. We document a market-based disciplinary mechanism: when funds diverge from their group's core strategy, investors withdraw capital. Funds respond to these punitive outflows by reducing their divergence from the peer group average at a faster rate.

Keywords: Mutual Fund Strategies, Prospectuses, Market Discipline, Fund Flows, Unsupervised Machine Learning

JEL Classification: G11, G23, L10

Suggested Citation

Abis, Simona and Lines, Anton, Do Mutual Funds Keep Their Promises? (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3851861 or http://dx.doi.org/10.2139/ssrn.3851861

Simona Abis

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/sa3518

Anton Lines (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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