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Costly Search And Mutual Fund Flows

In most OECD pension funds, bonds remain by far the dominant asset class, accounting for 50% of total assets under management on average (OECD Pension markets in focus July 2011). Green bonds could therefore be a channel to direct significant pension fund capital towards green projects. However the market size for green bonds is still small and illiquid at USD 15.6 billion as of August 2011 (see next section for discussion). Veys (2010) points out that an asset allocation move from equities to bonds within pension funds (as has happened in recent years) is a more significant change. | THE JOURNAL OF FINANCE VOL. LIII NO. 5 OCTOBER 1998 Costly Search and Mutual Fund Flows ERIK R. SIRRI and PETER TUFANO ABSTRACT This paper studies the flows of funds into and out of equity mutual funds. Consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period. Search costs seem to be an important determinant of fund f lows. High performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees. Flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs. Although much academic research on mutual funds addresses issues of performance measurement and attribution we can learn more from this industry than whether fund managers can consistently earn risk-adjusted excess returns. Researchers studying funds have shed light on how incentives affect fund managers behavior 1 how board structure affects oversight activities 2 and how scale and scope economies affect mutual fund costs and fees.3 More generally the fund industry is a laboratory in which to study the actions of individual investors who buy fund shares. In this paper we study the flows of funds into and out of individual U.S. equity mutual funds to better understand the behavior of households that buy funds and the fund complexes and marketers that sell them. Tufano is at the Harvard Business School Sirri is at the Securities and Exchange Commission. This paper is a substantial revision of an earlier working paper Buying and Selling Mutual Funds Flows Performance Fees and Services. We would like to thank René Stultz the editor an anonymous referee Jennifer Bethel Michael Brennan Dwight Crane Al Fan-some Ken Froot William Goetzmann Cliff Holderness Steve Kaplan Jay Light Rob Neal Tim Opler Jay Patel Rick Ruback Nicolaj Siggelkow Sheridan Titman .