Abstract
Mutual fund managers often follow investment strategies that result in a drift of their investment styles over time. This paper empirically examines whether the behavior of mutual fund investors is affected by this style drift using a comprehensive sample of U.S. actively-managed equity mutual funds from 1985 to 2013. I find a significant positive relationship between the style volatility and the subsequent fund flows to mutual funds. Further, this relationship is less pronounced for funds with superior past performance. Finally, fund style volatility has a dampening effect on the flow-performance relationship, as performance is perceived as a less informative signal of investment ability for fund managers who follow inconsistent styles over time.
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