The Portfolio Allocation Effects of Investor Sentiment about the Ability of Managers to Beat the Market

Sean Flynn

No 77, Vassar College Department of Economics Working Paper Series from Vassar College Department of Economics

Abstract: I present a model that can transform discounts on closed-end mutual funds into a measure of investor sentiment about the ability of fund managers to beat the market. This measure of sentiment varies positively with capital flows into actively managed open-end mutual funds, but negatively with capital flows into passively managed index funds. Investors appear to re-allocate their portfolios between actively and passively managed investment vehicles based on expectations about by how much managers will beat or trail the market.

Date: 2005-10
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