Mutual Fund Flows and Cross‐Fund Learning within Families

Abstract

We develop a model of performance evaluation and fund flows for mutual funds in a family. Family performance has two effects on a member fund's estimated skill and inflows: a positive common‐skill effect, and a negative correlated‐noise effect. The overall spillover can be either positive or negative, depending on the weight of common skill and correlation of noise in returns. Its absolute value increases with family size, and declines over time. The sensitivity of flows to a fund's own performance is affected accordingly. Empirical estimates of fund flow sensitivities show patterns consistent with rational cross‐fund learning within families.

Learning about Mutual Fund Managers

“…They argue that there are two opposite impacts, a positive common skill effect and a negative correlated noise effect, and that the first effect typically dominates. While our results on the flow‐performance relationship are generally consistent with Brown and Wu's () model, our focus is on cases in which two funds are managed by the same person. We find that manager skill is important and is different from family‐specific or industry‐wide information.…”

“…We therefore offer a conclusion that is different from prior studies. Brown and Wu (), for example, do not examine predictability and present no evidence suggesting anything other than a fully rational and frictionless world.…”

Investor Flows to Asset Managers: Causes and Consequences

“…Brown & Wu (2014) model this learning effect and find corresponding supportive empirical evidence of intrafamily learning.…”

“…As of 2012, approximately 30% of core diversified equity funds had such fees, by which 1%-2% of a short-horizon trade (e.g., a redemption within 90 days of an investment) is retained by the fund to compensate those remaining in the fund for the cost of the departure. The use of such fees has recently declined somewhat, possibly to attract short-term investors back from exchange-traded funds, which do not have such fees or minimum holding periods (Brown 2012). Europe now has a variant of this policy in UCITS (Undertakings for Collective Investment in Transferable Securities; funds that are registered to be sold across the European Union), in that they can honor inflows and redemptions at a bid/ask spread calibrated by the fund advisor to charge transactions costs to the investor.…”

The Risk-Adjusted Performance of Alternative Investment Funds and UCITS: A Comparative Analysis

“…Having said this, it is advantageous to assess the performance of the respective funds using a single benchmark for the sake of an unambiguous comparison. We did not account for different fund sizes within the sample that might give rise to economies or diseconomies of scale and impact on other fund characteristics (Berk & Green, 2004;Brown & Wu, 2016;Pástor et al, 2015). In addition, we abstracted from transaction costs and due to the criteria specified in the sampling process, the selected funds may not be representative of the entire population.…”