Smart Fund Managers? Stupid Money?

Dan Bernhardt (), Ryan J. Davies and Harvey Westbrook ()
Additional contact information
Harvey Westbrook : Securities and Exchange Commission, Washintgon DC

No icma-dp2002-19, ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University

Abstract: We develop a theoretical model of a mutual fund manager’s investment decision that incorporates three well-known observations: (i) past fund performance influences subsequent net fund inflows; (ii) fund manager compensation rises with total assets under management; (iii) trading has short-run price impacts. These observations provide fund managers the incentive to distort investment of new cash inflows toward stocks in which the fund holds larger positions. We show that this leads to the empirically observed short-run persistence and long-run reversal in fund performance. It also explains why mutual funds tend to be relatively undiversified and appear to exhibit clairvoyant stock selection.

Keywords: turn-of-quarter effect; painting the tape; mutual fund performance; investment distortion (search for similar items in EconPapers)
JEL-codes: D82 G2 G14 (search for similar items in EconPapers)
Date: 2002-09, Revised 2003-07
View citations in EconPapers

Downloads: (external link)
http://www.icmacentre.ac.uk/pdf/discussion/DP2002-19.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2002-19

Access Statistics for this paper

More papers in ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University
Contact information at EDIRC.
Series data maintained by Ed Quick ().