Abstract: I show that communication by fund managers to their investor clients fosters trust and encourages these investors to bear risk. Using an institutional setting that enables causal identification, I find that more detailed communication about risk encourages investors to increase their holdings in the market portfolio, driving flows into the stock market. I rule out learning about risk, returns or manager skill, and other potential explanations. Instead, my analysis shows this communication soothes investors' anxiety and alleviates their effective risk aversion, consistent with the money doctors framework of Gennaioli, Shleifer, and Vishny (2015).
Discussant: Caitlin Dannhauser, Villanova University
Abstract: This paper studies the direct impact of new technologies on the asset management industry. I show that technological innovations substantially improve fund managers’ ability to target customer demand and attract capital inflows, with implications for the industry’s structure. Exploiting information from their websites’ codes, I track when fund managers start collecting and analyzing customers’ data using tools like Google Analytics. Funds adopting such technologies attract 1.5% higher annual flows, with the effect being concentrated in retail share classes. Additionally, they expand product offerings and charge higher fees. The effects decrease with competition as more funds within the same category adopt similar technologies. Overall, these results show that technological innovation in asset management extends beyond portfolio allocation decisions to impact how funds attract and retain capital. This evidence highlights the economic importance of managers learning from investors’ data.
Discussant: Maxime Bonelli, London Business School
David S. Kim, Massachusetts Institute of Technology
Eric So, Massachusetts Institute of Technology
Abstract: We show a novel mechanism by which mutual fund managers strategically alter their portfolios to take advantage of investors’ reliance on Morningstar star ratings. Specifically, funds achieve higher ratings by changing their holdings to induce Morningstar to reclassify them into size/value style boxes with lower average performance, thereby enabling more favorable peer comparison. This practice, which we term ‘box jumping,’ attracts fund flows and higher fees, despite sacrificing return performance and the ratings upgrades reversing within three years on average. These patterns emerge after 2002 when Morningstar ratings began to be based on relative performance within style boxes, and are predictably absent beforehand. We also show that pervasive box jumping creates negative spillover effects on other funds. Together, our findings highlight portfolio recomposition as a novel and strategic lever that funds use to manipulate Morningstar ratings, and that funds box jump despite compromising returns due to investors’ fixation on ratings when allocating capital.
