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Can Mutual Fund Investors Distinguish Good from Bad Managers?
Author(s) -
Dyakov Teodor,
Verbeek Marno
Publication year - 2019
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12187
Subject(s) - mutual fund , sophistication , business , open end fund , econometrics , closed end fund , monetary economics , economics , finance , institutional investor , sociology , market liquidity , social science , corporate governance
Mutual fund flows respond significantly to the return gap, which captures information about unobserved actions of mutual funds and predicts future performance. The sensitivity of fund flows to the return gap is: (i) strong and positive; (ii) increasing with investor sophistication; (iii) highly nonlinear; and (iv) decreasing with the informativeness of past fund returns. On average, the response of investors to the return gap enhances their performance. Our findings suggest there is a sophisticated mass of investors who can distinguish good from bad managers using information that may not be directly inferred from standard performance indicators.