Mutual Fund Flows and Investor Disappointment

Abstract

We document that mutual fund flows are consistently negatively related to fund performance approximately six to ten years prior. This empirical regularity holds for actively managed U.S. funds, pertaining to both institutional and retail flows and to both inflows and outflows, as well as for U.S. index funds, U.S. fixed income funds, global equity funds, and global fixed income funds. We present findings supporting that the well-documented positive flow performance sensitivities (FPS) estimated with respect to recent fund returns arise at least in part because investors overweight recent fund returns in forming expectations of future returns, and that the negative FPS we document for longer return lags reflect investor disappointment when returns revert to normal levels.

JEL Classification: G10, G23