The DOI matches its Crossref record; 16 of the 16 references it cites were found in a registry or an index.
Mutual Fund Flows and Performance in Rational Markets
Abstract
We develop a simple rational model of active portfolio management that provides a natural benchmark against which to evaluate observed relationship between returns and fund flows. We show that many effects widely regarded as anomalous are consistent with this simple explanation. In the model, investments with active managers do not outperform passive benchmarks because of the competitive market for capital provision, combined with decreasing returns to scale in active portfolio management. Consequently, past performance cannot be used to predict future returns, or to infer the average skill level of active managers. The lack of persistence in active manager returns does not imply that differential ability across managers is nonexistent or unrewarded, that gathering information about performance is socially wasteful, or that chasing performance is pointless. A strong relationship between past performance and the ow of funds exists in our model, indeed this is the market mechanism that ensures that no predictability in performance exists. Calibrating the model to the fund flows and survivorship rates, we find these features of the data are consistent with the vast majority (80%) of active managers having at least enough skill to make back their fees.
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“If the market was largely comprised of the investors of Berk and Green (2004) who solely maximized prots, these investors who did not value sustainability would undo the eects of investors with a preference for sustainability, resulting in zero net ows.”
From Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows (2019) · cites this paper as Berk and Green 2004
Experimental — accuracy not yet measuredThe source backs part of the claim, not all of it — or backs it for a different population, condition or comparison.
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“If a small subset of investors had strong preferences for sustainability while most investors did not directly value sustainability, under standard models (e.g.Berk and Green 2004) we would not nd an eect of the ratings on net ows.”
From Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows (2019) · cites this paper as Berk and Green 2004
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In the citing paper
“Berk and Green (2004) assume that funds have decreasing returns to scale which is empirically supported by the ndings of Grinblatt and Titman (1989), Chen et al. (2004), Pástor et al. (2015) (though Reuter and Zitzewitz (2010) do not nd such an eect).”
From Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows (2019) · cites this paper as Berk and Green (2004)
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Citations
Cites
On Persistence in Mutual Fund Performance
Carhart, M. M. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb03808.x · Cited by 17,283
THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964
Jensen, M. C. (1968) · The Journal of Finance · doi:10.1111/j.1540-6261.1968.tb00815.x · Cited by 4,332
Managerial Incentive Problems: A Dynamic Perspective
Holmstrom, B. (1999) · Review of Economic Studies · doi:10.1111/1467-937x.00083 · Cited by 3,172
Costly Search and Mutual Fund Flows
Sirri, E. R., & Tufano, P. (1998) · The Journal of Finance · doi:10.1111/0022-1082.00066 · Cited by 3,079
Measuring Mutual Fund Performance with Characteristic-Based Benchmarks
Daniel, K., Grinblatt, M. S., Titman, S. D., & Wermers, R. R. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb02724.x · Cited by 2,800
Risk Taking by Mutual Funds as a Response to Incentives
Chevalier, J. A., & Ellison, G. (1997) · Journal of Political Economy · doi:10.1086/516389 · Cited by 2,295
Another Puzzle: The Growth in Actively Managed Mutual Funds
Gruber, M. J. (1996) · The Journal of Finance · doi:10.1111/j.1540-6261.1996.tb02707.x · Cited by 2,113
Returns from Investing in Equity Mutual Funds 1971 to 1991
MALKIEL, B. G. (1995) · The Journal of Finance · doi:10.1111/j.1540-6261.1995.tb04795.x · Cited by 1,745
Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry
Ippolito, R. A. (1992) · The Journal of Law and Economics · doi:10.1086/467244 · Cited by 1,029
Randolph, P. H., & Groot, M. D. (1970) · Technometrics · doi:10.1080/00401706.1970.10488715 · Cited by 986
Flagged first, then by citations
Research works printed but not linked: 6
- Berk Jonathan B, 2002, Green
- Bernhardt Dan, Discussion Paper in Finance no. 2002‐19.
- Bollen Nicolas P. B., Busse
- Chen Hsiu‐lang, 2002, Pennacchi
- Getmansky Mila, Manuscript
- Ross Stephen A, 2002, Jaffe
Cited by
Sorted by citations
Quantifying Managerial Ability: A New Measure and Validity Tests
Demerjian, P. R., Lev, B. I., & McVay, S. E. (2011) · Management Science · doi:10.1287/mnsc.1110.1487 · Cited by 1,900
“…a number of papers have used DEA to measure firm efficiency (e.g., Thore et al. 1994; Murthi et al. 1996; Murthi et al. 1997; Barr and Siems 1997; Berk and Green 2004; Berk and Stanton 2007; Leverty and Grace 2011), we are the first to measure efficiency for a large cross-section of firms,…”
BackgroundMethodLuck versus Skill in the Cross‐Section of Mutual Fund Returns
Fama, E. F., & French, K. R. (2010) · The Journal of Finance · doi:10.1111/j.1540-6261.2010.01598.x · Cited by 1,738
“Thus, for percentiles above the 90th, the CAPM t(α) Luck versus Skill in Mutual Fund Returns 1945 Table AI Percentiles of CAPM t(α) Estimates for Actual and Simulated Fund Returns The table shows values of t(α) at selected percentiles (Pct) of the distribution of CAPM t(α) estimates for actual (Act) net and gross fund…”
InfluentialAsset Fire Sales (and Purchases) in Equity Markets
Coval, J. D., & Stafford, E. (2005) · Journal of Financial Economics · doi:10.1016/j.jfineco.2006.09.007 · Cited by 1,602
How Active Is Your Fund Manager? A New Measure That Predicts Performance
Cremers, M., & Petäjistö, A. (2009) · Review of Financial Studies · doi:10.1093/rfs/hhp057 · Cited by 1,574
Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows
HARTZMARK, S. M., & SUSSMAN, A. B. (2019) · The Journal of Finance · doi:10.1111/jofi.12841 · Cited by 1,711
Metadata
- Authors
- Berk, J. B., & Green, R. C.
- Affiliations
- National Bureau of Economic Research (US)
- Carnegie Mellon University (US)
- ORCID
- Berk, Jonathan B.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 2004-12
- Volume
- 112
- Issue
- 6
- Pages
- 1269-1295
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W3022326679
- Cited by
- 2,083
- References
- 16
- Citations by year
- 2026: 118 · 2025: 123 · 2024: 179 · 2023: 135 · 2022: 128 · 2021: 130 · 2020: 130 · 2019: 105 · 2018: 106 · 2017: 97 · 2016: 83 · 2015: 93 · 2014: 72 · 2013: 92 · 2012: 105
- FWCI
- 54.34
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Political Economy (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Keywords
- mutual fund flows, fund performance, active portfolio management, rational expectations, performance persistence, active vs passive investing, financial intermediaries, information aggregation
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