Mutual Funds Apart From the Crowd
April 23, 2016
Nadia Vozlyublennaia and Youchang Wu
Access this paper via SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2769161
We construct measures of mutual fund uniqueness using cluster analysis of fund returns. We find that more unique funds charge higher management fee and have higher total expense ratios, and deliver better net-of-fee performance than do funds that are otherwise similar. More importantly, fund flows are less sensitive to the performance of unique funds than to the performance non-unique funds, and the performance of unique funds is more persistent. In addition, both the dampening effects of fund uniqueness on the flow-performance sensitivity and the amplifying effect of fund uniqueness on performance persistence are stronger for underperforming funds than for well-performing funds. These results suggest that unique funds have better managerial skill, and are better able to retain investors after poor performance, potentially due to the lack of close substitutes. This slows down the adjustment of fund size toward the equilibrium level, and increases the persistence of poor performance.