tailieunhanh - Changing Names with Style: Mutual Fund Name Changes and Their Effects on Fund Flows

A younger investor, less concerned about these issues, may not be sat- isfied with the lower expected return that inflation hedging implies. It follows from a model with additional hedge portfolios that an OE portfolio for performance evaluation should have the same exposures as the managed portfolio to be evaluated, not just with respect to the overall market, but also with respect to the other relevant risk factors. A related asset pricing model is the Arbitrage Pricing model of Ross (APT, 1976), which allows for several risk factors to determine assets’ expected returns. In the case of the APT the number of fac- tors depends on the dimensionality of the. | THE JOURNAL OF FINANCE VOL. LX NO. 6 DECEMBER 2005 Changing Names with Style Mutual Fund Name Changes and Their Effects on Fund Flows MICHAEL J. COOPER HUSEYIN GULEN and P RAGHAVENDRA RAU ABSTRACT We examine whether mutual funds change their names to take advantage of current hot investment styles and what effects these name changes have on inflows to the funds and to the funds subsequent returns. We find that the year after a fund changes its name to ref lect a current hot style the fund experiences an average cumulative abnormal flow of 28 with no improvement in performance. The increase in flows is similar across funds whose holdings match the style implied by their new name and those whose holdings do not suggesting that investors are irrationally inf luenced by cosmetic effects. Mutual funds offer a unique opportunity to study the behavior of individual investors via the examination of mutual fund flow data. This is important since investors asset allocation decisions across mutual funds may ultimately affect asset returns. For example Goetzmann Massa and Rouwenhorst 2002 document that factors extracted from the covariance matrix of mutual fund f lows provide incremental information beyond broad-based asset class returns in explaining returns in the cross-section. In this paper we provide striking new evidence of seemingly irrational behavior by mutual fund investors when they allocate assets across mutual funds. We also provide evidence of timing behavior on the part of fund managers who appear to take advantage of the suboptimal behavior of investors. Specifically we analyze fund flow patterns around conditional name changes in the mutual fund industry. We define conditional name changes as name changes by mutual funds either toward a name of a particular style when the corresponding style premium is up or away from a name of a particular style when the corresponding style premium is down. We examine what effects these name changes have on the f lows in and