Costly Search and Mutual Fund Flows
ERIK R. SIRRI and PETER TUFANO
Title, authors, journals
Title: Costly Search and Mutual Fund Flows
Authors: ERIK R. SIRRI and PETER TUFANO
Journal: THE JOURNAL OF FINANCE
Research Question + underlying intuition
Underlying intuition: This paper studies the flows of funds into and out of individual U.S. equity
mutual funds to better understand the behaviour of households that buy funds and the fund
complexes and marketers that sell them. Mainly, this paper shows that mutual fund consumers chase
returns, flocking to funds with the highest recent returns, though failing to flee from poor
performers. Consumers are fee-sensitive in that lower-fee funds and funds that reduce their fees
grow faster. The study looks also into the implications of costly search for mutual fund flows. Using
different measures of search costs, the authors find that funds that receive greater media attention
and that belong to larger complexes grow more rapidly than other funds. Also, the performance-flow
relationship is most pronounced among funds with higher marketing effort (reflected in higher fees),
which in turn lowers the consumers’ search costs.
Hypotheses
I. Historical Performance and Mutual Fund Flows
A. Predictions from a Costless-Search Model of Mutual Fund Buying Behavior
If consumers can collect and process mutual fund information at zero cost this study might expect to
find:
• a performance-flow relationship among the worst-performing funds, as consumers realize
the likelihood that these funds may continue to perform poorly;
, • an observable, but possibly weaker, performance-flow relationship among the best-
performing funds, as consumers may believe that excellent performance may repeat;
• a negative relationship between risk borne and flows (holding constant performance and
fees), as consumers would always prefer less risk to more, and
• a negative relationship between fees charged and flows, ceteris paribus, reflecting
consumers’ elasticity of demand with respect to the price of investment management
services.
Data
- The sample consists of the three main objective categories of equity mutual funds:
o aggressive growth,
o growth and income,
o and long-term growth funds.
- In total, the sample includes 690 funds offered by 288 different mutual fund families.
- Table I describes the funds in the sample at three points in time: 1971, 1980, and 1990.
ERIK R. SIRRI and PETER TUFANO
Title, authors, journals
Title: Costly Search and Mutual Fund Flows
Authors: ERIK R. SIRRI and PETER TUFANO
Journal: THE JOURNAL OF FINANCE
Research Question + underlying intuition
Underlying intuition: This paper studies the flows of funds into and out of individual U.S. equity
mutual funds to better understand the behaviour of households that buy funds and the fund
complexes and marketers that sell them. Mainly, this paper shows that mutual fund consumers chase
returns, flocking to funds with the highest recent returns, though failing to flee from poor
performers. Consumers are fee-sensitive in that lower-fee funds and funds that reduce their fees
grow faster. The study looks also into the implications of costly search for mutual fund flows. Using
different measures of search costs, the authors find that funds that receive greater media attention
and that belong to larger complexes grow more rapidly than other funds. Also, the performance-flow
relationship is most pronounced among funds with higher marketing effort (reflected in higher fees),
which in turn lowers the consumers’ search costs.
Hypotheses
I. Historical Performance and Mutual Fund Flows
A. Predictions from a Costless-Search Model of Mutual Fund Buying Behavior
If consumers can collect and process mutual fund information at zero cost this study might expect to
find:
• a performance-flow relationship among the worst-performing funds, as consumers realize
the likelihood that these funds may continue to perform poorly;
, • an observable, but possibly weaker, performance-flow relationship among the best-
performing funds, as consumers may believe that excellent performance may repeat;
• a negative relationship between risk borne and flows (holding constant performance and
fees), as consumers would always prefer less risk to more, and
• a negative relationship between fees charged and flows, ceteris paribus, reflecting
consumers’ elasticity of demand with respect to the price of investment management
services.
Data
- The sample consists of the three main objective categories of equity mutual funds:
o aggressive growth,
o growth and income,
o and long-term growth funds.
- In total, the sample includes 690 funds offered by 288 different mutual fund families.
- Table I describes the funds in the sample at three points in time: 1971, 1980, and 1990.
