Think you can choose your asset manager? Think again – mutual fund investors’ inability to distinguish fund managers’ skill

Abstract

In this thesis, I contribute to the existing understanding of mutual fund flows and investor behaviour. I start by providing further evidence on that mutual fund investors tend to follow common factor-related returns, implicating that investors confuse factor-related returns with real fund managerial skill. I continue by showing that mutual funds which have attracted the most fund flows due to factor-related returns offer the lowest expected future performance for a subsequent period measured in investors’ net alphas. I conclude by providing evidence on the impact that investors’ inability to recognise managerial skill has directly on investors’ returns measured in risk-adjusted basis.