Mutual Fund Flows at Long Horizons

We document that increased mutual fund flows after high returns are partially reversed at longer horizons, attributable to greater outflows rather than reduced inflows. We test theories with potential to explain this flow reversal: investment lifecycles, tax loss selling, and a behavioral disappointment hypothesis that is based on investor overreactions to recent positive returns. While tax loss selling contributes to explaining outflows, the evidence most strongly supports the behavioral explanation. As predicted, outflow coefficients are positive when recent returns are normal, and outflow magnitudes depend on differences between recent returns and the prior returns that attracted inflows, even after allowing for direct effects of recent returns.

Mutual fund flow-performance sensitivity investor disappointment