Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability


  • *University of Michigan Business School and Yale School of Management. I am grateful to Mark Carhart, Eugene Fama, and Kenneth French for providing the mutual fund data. I thank Christopher Blake, Edwin Elton, Wayne Ferson, Kenneth French, William Goetzmann, Martin Gruber, Roger Ibbotson, Jonathan Ingersoll, Andrew Karolyi, Nagpurnanand Prabhala, Geert Rowenhorst, René Stulz, Charles Trzcinka, Jason Yao, and an anonymous referee for useful comments and suggestions. I thank participants at the American Finance Association Conference, the Eastern Finance Association Conference, the European Finance Association Conference, the Financial Management Association International Conference, the Seventh Conference on Financial Economics and Accounting at Rutgers, Fordham University, Georgia State University, the London Business School, Ohio State University, Pennsylvania State University, Tulane University, the University of California at Davis, the University of Georgia, the University of Illinois at Urbana-Champaign, the University of Maryland, the University of Michigan, the University of Wisconsin-Madison, and Yale University.


A previous study finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that funds that receive more money subsequently perform significantly better than those that lose money. This effect is short-lived and is largely but not completely explained by a strategy of betting on winners. In the aggregate, there is no significant evidence that funds that receive more money subsequently beat the market. However, it is possible to earn positive abnormal returns by using the cash flow information for small funds.