When is money smart? Mutual fund flows and disposable income

Abstract

This study shows that the representative mutual fund investor's ability increases with the time-varying constraints on household disposable income at the aggregate level. I use changes in retail energy prices to proxy for short-run changes in the disposable income of potential investors. Flows to actively-managed U.S. equity funds decrease with the constraints on disposable income. The representative investor shows fund selection and timing ability in periods when the constraints on disposable income sharply increase, but no discernable ability otherwise. The results are consistent with money being smarter when the constraints on household disposable income in the economy are more binding.