Performance-Chasing Behavior and Mutual Funds: New Evidence from Multi-Fund Managers

We study managers who simultaneously manage multiple mutual funds to provide new evidence on investors’ performance-chasing behavior. Consistent with the idea that investors infer managerial ability from past returns, we show that flows into a fund of a multi-fund manager are predicted by the performance in both the corresponding fund and the other fund he manages. Performance in one fund predicts flows into the other fund more prominently when the fund does particularly well, and when the performance in the two funds is more different. Nonetheless, investors do not seem to move their capital sufficiently in response to performance in the manager’s other fund; we find that past performance in one fund predicts subsequent performance in the other. This predictability is likely due to the presence of some investors who do not withdraw enough capital from a fund when their manager performs poorly in his other fund.