This study investigates the contribution of star funds to fund families in the Korean fund market. We find that star-fund families that feature either star funds or higher relative holdings of star funds attract more new investment than non-star-fund families. Our test shows the existence of a spillover effect from star funds to non-star funds that helps non-star funds and newly launched funds in the family to raise fresh capital. We also find that a fund family's performance in the future tends to be better if it has higher relative holdings of star funds. This supports the smart-money effect at the fund-family level as investors put more money into high-star fund holding ratio families. Furthermore, there exists a persistency in star fund holdings for high-star fund holding ratio families. Therefore, we cannot reject the hypothesis that star-fund families have better fund-management skills than non-star-fund families, especially when we define a high-star fund holding ratio family as a star family. In the present study, there are two important explanatory variables for representing a star-fund family: SFdummy, which denotes the fund family's holding at least 1 star fund, and SFratio, which is the ratio between the net asset value of star funds in the family and the total net asset value of funds in the family. Although both variables can explain the contribution of star funds to fund families, SFratio is found to have superior explanatory power; consequently, we propose that this variable be used in lieu of SFdummy in future fund-family related studies.
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