Abstract
In this paper, we analyze the effect of loads on the relationship between mutual fund performance and investment flows. Using a sample of US domestic non-industry-specific mutual funds from 1993 to 2006, we show that the presence of front loads increases the sensitivity of fund flows to less recent performance. We show that this effect is stronger for funds that experience positive net flows than for those with negative net flows. We also show that other kinds of distribution costs, like deferred loads and 12b-1 fees, do not generate the same effect. These two pieces of evidence suggest that investors, when faced with the necessity to incur an up-front cost for buying mutual fund shares, look for a stronger and more stable signal of managerial ability. We also document that this alteration in the investment behavior does not increase significantly the degree of money smartness of mutual fund flows.
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