Is Money Really 'Smart'? New Evidence on the Relation between Mutual Fund Flows, Manager Behavior, and Performance Persistence

56 Pages Posted: 23 Jul 2003

See all articles by Russ Wermers

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: May 2003


Mutual fund returns strongly persist over multi-year periods - that is the central finding of this paper. Further, consumer and fund manager behavior both play a large role in explaining these long-term continuation patterns - consumers invest heavily in last-year's winning funds, and managers of these winners invest these inflows in momentum stocks to continue to outperform other funds for at least two years following the ranking year. By contrast, managers of losing funds appear reluctant to sell their losing stocks to finance the purchase of new momentum stocks, perhaps due to a disposition effect. Thus, momentum continues to separate winning from losing managers for a much longer period than indicated by prior studies.

Even more surprising is that persistence in winning fund returns is not entirely explained by momentum - we find strong evidence that flow-related buying, especially among growth-oriented funds, pushes up stock prices. Specifically, stocks that winning funds purchase in response to persistent flows have returns that beat their size, book-to-market, and momentum benchmarks by two to three percent per year over a four-year period. Cross-sectional regressions indicate that these abnormal returns are strongly related to fund inflows, but not to the past performance of the funds - thus, casting some doubt on prior findings of persistent manager talent in picking stocks. Finally, at the style-adjusted net returns level, we find no persistence, consistent with the results of prior studies. On balance, we confirm that money is smart in chasing winning managers, but that a "copycat" strategy of mimicking winning fund stock trades to take advantage of flow-related returns appears to be the smartest strategy.

Keywords: mutual funds, market efficiency, performance evaluation

JEL Classification: G11, G12, G14

Suggested Citation

Wermers, Russell R., Is Money Really 'Smart'? New Evidence on the Relation between Mutual Fund Flows, Manager Behavior, and Performance Persistence (May 2003). Available at SSRN: or

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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