Performance Evaluation Disagreement

Determinants and Impact on Fund Flows

Abstract

This paper studies investor disagreement in the performance evaluation of equity mutual funds by comparing two existing approaches and estimating its relations with fund characteristics, active management level and fund flows. We find that investors disagree more about the performance of funds that have higher expense ratio and turnover, lower manager tenure and dividend yield, and that are older, smaller and part of a larger family. Disagreement is also higher for funds that follow riskier investment style strategies and deviate more from their benchmarks. Finally, larger disagreement leads to more net fund flows. These findings suggest that heterogeneous investors do not value funds with aggressive active trading strategies similarly, and that favorable valuations by some clienteles result in positive demands for this type of management.