Past Performance May Be an Illusion: Performance, Flows, and Fees in Mutual Funds

Blake Phillips, Kantura Pukthuanthong and Raghavendra Rau

Critical Finance Review, 2016, vol. 5, issue 2, 351-398

Abstract: Mutual funds report performance in the form of a holding period return (HPR) over standardized horizons. Changes in HPRs are equally influenced by new and previously reported stale returns which enter and exit the horizon. Investors appear unable to differentiate between the joint determinants, reacting with equal strength to both signals. Stale performance chasing is amplified for funds which promote performance via advertising and is more pronounced during periods of uncertainty in financial markets. Fund managers exploit this behavior by preferentially timing fee increases to align with periods of heightened investor demand resulting from stale performance chasing.

Keywords: Limited attention; Behavioral finance; Investor psychology; Capital markets; Horizon Effects; Mutual fund fee-setting (search for similar items in EconPapers)
JEL-codes: G32 J31 R21 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000032

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