Purpose -We investigate the drivers of investment flows into Brazilian mutual funds.Design/methodology/approach -The database consists of a panel of Brazilian mutual funds covering the period between January 2001 and April 2019. First, we identify which performance metric is most related to the funds' flows. Then we analyze how the results differ depending on investor sophistication.Findings -Investors pay more attention to market risk (beta) when evaluating funds, while they attribute returns tied to size, value, momentum, and industry factors to the alpha. These results are consistent with those reported for the United States. Additionally, we document that less sophisticated investors are relatively more sensitive to all past return metrics. However, when fund alphas are broken down into a persistent component and a random component, greater sensitivity is concentrated in the random component of the alphas.Originality/value -The sensitivity of fund flows to different performance metrics is measured, and this allows us to better understand investors' decision-making processes. Moreover, to the best of our knowledge, this is the first paper to address this issue with data from outside the United States.
This paper use Exchange Traded Funds (ETFs) instead of risk factors as benchmarks to examine active mutual fund performance distribution. While transaction costs are included in the ETF returns, that is not true regarding risk factors, making it more challenging to characterize extraordinary performances via alphas. Assessments are based on the proportion of skilled funds, defined as positive-alpha funds. Such a proportion is calculated taking into account potential false discoveries and employing the method devised by Barras et al. (2010). After evaluating several ETF combinations, we conclude that sets of 3 to 5 ETFs replicate most levels of active fund performance. Finally, we propose specific ETF selection algorithms, whereby we estimate that 95% of active management funds fail to generate value for their investors. Alphas calculated with ETFs are higher than those using risk factors, but the difference is similar to the transaction costs required for investing in risk factor portfolios (Frazzini et al., 2012).
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