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INVESTOR REACTION TO MUTUAL FUND PERFORMANCE: EVIDENCE FROM UK DISTRIBUTION CHANNELS

Authors


  • We are grateful for comments from an anonymous referee, Vikas Agarwal, Christopher Blake, Long Chen, Keith Cuthbertson, Martin Gruber, Michel Habib, Tim Johnson, Jayant Kale, Charles Kahn, José Moreira, Kjell Nyborg, Ana Paula Serra, Jay Wang, and Scott Weisbenner. We also thank seminar participants at Washington University at St. Louis, the University of Illinois at Urbana-Champaign, Georgia State University, the Norwegian School of Economics and Business Administration, Toulouse Business School, and the universities of Essex, Exeter, Porto, and Zurich as well as conference participants at the 2008 European Finance Association annual meeting in Athens and at the Inquire UK Autumn 2008 conference. We thank Dimensional Fund Advisors, the Allenbridge Group, the Investment Management Association, and Stefan Nagel for help with data; Heng Lei for research assistance; and INQUIRE-UK for funding this research project. All errors and omissions are ours.

Abstract

Existing work on the flow–performance relation in mutual funds focuses on the average U.S. investor, obscuring the contributions of different clienteles. We analyze UK data on monthly fund sales and purchases made via seven distinct distribution channels. We show that there exist marked differences in the reaction to fund performance between different types of retail and institutional investors. These differences can be understood by considering the incentives of parties involved in each channel. Our analysis indicates that the well-documented aggregate net flow–performance convexity in mutual funds is driven by the extreme reaction of retail inflows to favorable performance, particularly from independently advised investors.

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