Investor Mix and Mutual Fund Performance: A Flow Based Measure of Relative Smartness
48 Pages Posted: 30 Oct 2019 Last revised: 3 Mar 2020
Date Written: February 11, 2020
We study the information content of the mutual-fund investor mix at the fund level. Building on the fund-flow determinant literature, we develop a method to attribute the proportion of fund net-in-flow explained by a fund’s fundamental characteristics and past performance as smart and dumb money respectively. The fund-level Smart Dumb Ratio (SDR) positively predicts future cross-sectional fund return. A series of tests shows that SDR postively correlates with other skill measures and its effects are enhanced with investor sophistication. Our findings confirm that the investor composition can be a useful source of information to estimate the fund-level smart-money effect.
Keywords: mutual-fund flows, risk factors, non-risk factors, smart-money effect, CAPM
JEL Classification: G11, G12
Suggested Citation: Suggested Citation