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What Do Mutual Fund Investors Really Care About?

Author

Listed:
  • Ben-David, Itzhak

    (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER))

  • Li, Jiacui

    (Stanford University, Graduate School of Business, Students)

  • Rossi, Andrea

    (University of Arizona - Department of Finance)

  • Song, Yang

    (University of Washington - Department of Finance and Business Economics)

Abstract

Rational investors should account for risk factor exposure when allocating capital to mutual funds. Two recent influential studies use mutual fund flows to test whether investors distinguish between performance driven by managers' skill and systematic risk factors. Both studies found that investors use the Capital Asset Pricing Model (CAPM), and one concluded that the CAPM is the "closest to the true asset pricing model." We re-examine these results and show that, in fact, fund flow data are most consistent with investors relying blindly on fund rankings (specifically, Morningstar ratings) and chasing recent returns. We find no evidence that investors account for any of the common systematic risk factors when allocating capital among mutual funds.

Suggested Citation

  • Ben-David, Itzhak & Li, Jiacui & Rossi, Andrea & Song, Yang, 2019. "What Do Mutual Fund Investors Really Care About?," Working Paper Series 2019-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-5
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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