Mutual Fund Competition with Misspecified Investment Objectives
24 Pages Posted: 18 Mar 2005
Date Written: June 17, 2003
This paper studies the relation between past performance and fund flows into and out of mutual funds in the Italian market. Using monthly data on more than 800 funds divided in 23 investment categories I try to evaluate the length of the relevant evaluation period used by investors to measure the past performance of mutual funds, the level of competition between funds that operate in different investment categories and the likeliness between the behavior of gross investments (flows into mutual funds) and withdrawals (flows out of mutual funds). I find that investors evaluate fund performance on a very short time horizon (three months seems to be the relevant period), that the relevant performance measure is the position in the category ranking and not the return of the fund (the competition is segmented: funds do not compete across categories), that while fund inflows are related positively to past performance there is not any sensible relation between withdrawals and past performance.
Keywords: Mutual Funds, Investment Flows, Investment Objectives
JEL Classification: D14, G23
Suggested Citation: Suggested Citation