Can Mutual Fund Investors Distinguish Good from Bad Managers?

Teodor Dyakov and Marno Verbeek

International Review of Finance, 2019, vol. 19, issue 3, 505-540

Abstract: Mutual fund flows respond significantly to the return gap, which captures information about unobserved actions of mutual funds and predicts future performance. The sensitivity of fund flows to the return gap is: (i) strong and positive; (ii) increasing with investor sophistication; (iii) highly nonlinear; and (iv) decreasing with the informativeness of past fund returns. On average, the response of investors to the return gap enhances their performance. Our findings suggest there is a sophisticated mass of investors who can distinguish good from bad managers using information that may not be directly inferred from standard performance indicators.

Date: 2019
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International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

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