Market frictions, investor sophistication, and persistence in mutual fund performance

Authors: Ariadna Dumitrescu and Javier Gil-Bazo

Journal of Financial Markets, Vol. 40, 40-59, February, 2018

e extend the model of Berk and Green (2004) to investigate the impact of two frictions, search costs and financial constraints, on mutual fund performance. Our model predicts the survival of underperforming funds and delivers two new predictions: 1) differences in performance across funds are likely to persist; and 2) mutual funds targeted to less sophisticated investors should exhibit higher dispersion in expected performance. Using data on U.S. domestic diversified equity mutual funds we find empirical support for these predictions.

This paper originally appeared as Barcelona GSE Working Paper 816