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The wisdom of crowds: Mutual fund investors’ aggregate asset allocation decisions

John Chalmers, Aditya Kaul and Blake Phillips

Journal of Banking & Finance, 2013, vol. 37, issue 9, 3318-3333

Abstract: We find that the aggregate asset allocation decisions of US mutual fund investors depend on economic conditions. Both anticipated economic downturns and periods of turmoil lead investors to direct flow away from risky equity funds and towards lower-risk money market funds. These patterns are markedly stronger for investors in low cost and low turnover funds relative to investors in high cost and high turnover funds, consistent with sophisticated investors being more sensitive to changing conditions. Benchmarked against a buy-and-hold strategy, these asset allocation strategies reduce risk without degrading the risk-return trade-off. Our evidence suggests that individual investors, often dismissed as noise traders, collectively react to economic signals in a sensible manner when determining asset allocations.

Keywords: Mutual fund; Mutual fund flow; Asset allocation (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 G32 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3318-3333