Broken Promises, Competition, and Capital Allocation in the Mutual Fund Industry
93 Pages Posted: 24 May 2021 Last revised: 15 Sep 2023
Date Written: August 10, 2023
What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises.
Keywords: Mutual Fund Strategies, Prospectuses, Industrial Organization, Fund Flows, Machine Learning
JEL Classification: G11, G23, L10
Suggested Citation: Suggested Citation