Critical Finance Review > Vol 5 > Issue 2

Past Performance May Be an Illusion: Performance, Flows, and Fees in Mutual Funds

Blake Phillips, School of Accounting and Finance, University of Waterloo, Canada, , Kantura Pukthuanthong, Robert Trulaske Sr. College of Business, University of Missouri, USA, , P. Raghavendra Rau, University of Cambridge, UK,
Suggested Citation
Blake Phillips, Kantura Pukthuanthong and P. Raghavendra Rau (2016), "Past Performance May Be an Illusion: Performance, Flows, and Fees in Mutual Funds", Critical Finance Review: Vol. 5: No. 2, pp 351-398.

Publication Date: 21 Dec 2016
© 2016 B. B. Phillips, K. Pukthuanthong, and P. R. Rau
Limited attentionBehavioral financeInvestor psychologyCapital marketsHorizon EffectsMutual fund fee-setting


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In this article:
1. Introduction 
2. Literature Review and the General Setting 
3. Measuring Investor Reaction to Stale Performance 
4. Do Investors Chase Stale Returns? 
5. Does Fund Advertising Take Advantage of Stale Return-chasing Behavior? 
6. What Does Stale Performance-chasing Depend on? 
7. Do Mutual Funds Change Their Fees to Take Advantage of Stale Performance Chasing? 
8. Conclusions 


Mutual funds report performance in the form of a holding period return (HPR) over standardized horizons. Changes in HPRs are equally influenced by new and previously reported stale returns which enter and exit the horizon. Investors appear unable to differentiate between the joint determinants, reacting with equal strength to both signals. Stale performance chasing is amplified for funds which promote performance via advertising and is more pronounced during periods of uncertainty in financial markets. Fund managers exploit this behavior by preferentially timing fee increases to align with periods of heightened investor demand resulting from stale performance chasing.